Double 11, Double 12, Black Friday, 6.18…Why are e-commerce festivals so addictive?

Promotion has replaced sales, and we are forced to do it but we can’t stop. If you overdraw the consumer market, how many customers will you have left in the future?

Double 11, Double 12, Black Friday, 6.18... many new shopping festivals have emerged under the packaging and promotion of merchants, impacting people's consumption habits and consumers' wallets. The giants set the pace, making it difficult for the market to stop in the wave of promotions; merchants of all sizes are also unwilling to be left out, contributing a variety of promotional forms and promotional prices with amazing discounts.

At the same time, the merchants who originally took the initiative to promote sales have gradually been influenced by the market and can no longer do without promotions. While merchants are helpless in promoting sales, the concentrated outburst of consumption brought about by promotions will lead to a situation where consumers overdraw the market. How many customers will you have left in the future?

1. Promotion addiction: helpless but excited merchants

Behind the merchants who welcome customers with smiles, there is a hint of helplessness. Once they enter this endless wave of promotions, it seems that the promotions will never stop. The first phase of activities has not yet ended, and we are about to prepare for the next phase of activities; 365 days a year, many businesses never miss promotional activities. The intensity of the activities is gradually increasing, and the reserve price is constantly being refreshed in each promotion, and the prices are so low that they are a bit unaffordable. However, the promotions have become addictive and cannot be stopped.

1. The anchor point is lowered, and it is necessary to promote

With the development of marketing , the forms of promotional activities are becoming more and more diverse. However, whether it is deposit inflation, discounts on purchases above a certain amount, or buy one get one free or half price on the second cup, in essence, they are all reducing the actual price of each unit of the product, which invisibly lowers the price anchor point in the customers' minds.

A price anchor is a reference point that consumers use to assess the value of a product. Generally, there are two types of price anchor points. One is the external anchor point, which we can simply understand as the price given by the merchant. The other is the internal anchor point, which is the price the product has had in the past and the price that products of the same quality should have in the consumer's cognition and experience.

During the promotion process, merchants use various means to reduce the actual price of each unit of product, thereby lowering the customer's intrinsic price anchor. This reduces customers’ assessment of the product’s value. That is to say, after the promotion, when the price returns to the original price, customers who have learned about the product will value the product at a lower value than the regular price of the product. Therefore, when the merchant still uses the regular price, customers will no longer be willing to buy products that are valued at a lower value than the regular price.

As shown in the figure, as the external anchor point decreases, that is, the actual price of the product decreases during the promotion, the customer's internal anchor point and valuation of the product are also decreasing. However, due to factors such as brand and reputation, the customer's valuation does not decrease as fast as the internal anchor point, but it is still difficult to return to the original point after the event. If merchants want to create the feeling of being cheap enough again to attract popularity and achieve promotional effects, they must offer more favorable prices when promoting again, but this also exacerbates the customers' internal anchor points and the decline in their valuation of products. This creates a vicious cycle in which merchants continue to promote products while customers' valuations of products continue to decline.

It’s not that there are no ways to break the vicious cycle:

1. Reduce the frequency of activities and wait for the customer's valuation to slowly recover;
2. Increase the complexity of activities and make it more difficult to obtain the reserve price, thereby slowing down the decline in valuation;
3. Continuously iterate and replace old products with new ones.

These methods can objectively improve the rate of decline in valuations, but they cannot actually stop the decline in valuations. After each event ends, when the product returns to its original price, since the valuation has not fully recovered, there will inevitably be a period of consumer sluggishness. Under the pressure of sluggish customer spending and performance targets, few managers can withstand the pressure and have no choice but to launch the next promotion.

2. Competition forces us to promote

Competition is always an enemy, and sometimes this statement is absolutely true. Being in the same industry and marketing the same products, even if you don’t want to do promotions, your competitors will “force you” to do them.

On the one hand, there is the price anchor factor we just mentioned. Not only will your own promotional price leave an intrinsic anchor for customers, but your competitor’s lowest price will also serve as an intrinsic price anchor for customers to use to value your product. This effect is most pronounced when competitive positioning is similar. Think about KFC and McDonald's , China Mobile and China Unicom. Whether it is product prices or promotion strategies, they all closely influence each other.

On the other hand, there is the crowding out of market space. The market space, no matter how vast, is ultimately limited. Moreover, it seems easier to steal customers and potential customers from competitors than to re-educate the market. Just imagine, when your competitors use continuous low-price promotions to take away some of your customers and potential customers, how can you sit idly by?

A friend of mine runs a plastic surgery hospital in a second-tier city. When he entered the market ten years ago, there were relatively few competitors and the competition was not particularly fierce. As new competitors continue to emerge, the market is becoming crowded and low-price promotions are gradually escalating.

At the beginning, their price competition was just "15% off across the board" and "20% off". But once a price war starts, it will be difficult to stop it. "50% off" and "half price" have gradually become their regular promotional terms. Nowadays, they cannot carry out promotional activities without mentioning words like 10% off, one yuan, or free.

With homogeneous competition rampant, competitors’ low-price promotion strategies force them to compromise and follow the promotion trend, otherwise they will face a situation where their stores are deserted.

What’s interesting is that in their current competitive situation, even if customers know that their promotions are based on tricks, they will choose a trick that appears to be more favorable on the surface among several tricks, and give priority to understanding and trying it. This also further strengthened their competitive strategy of "fighting the price war to the end".

3. There is profit, but we still need to promote

If the factors of customers and competitors are external factors, then the internal factor is that it is still profitable to reduce prices and promote sales, even if the current profits are obtained by overdrawing the market. We will talk more about the overdraft market later. Let’s first look at how profits are maintained in a low-price promotion strategy.

(1) Price elasticity of demand

Price elasticity of demand refers to the degree to which the quantity demanded responds to changes in price. For a product, if the rate of change of demand divided by the rate of change of price is greater than one, it means that the demand for the product is elastic. In this case, a drop in price will lead to a surge in demand, thereby increasing total profits.

Assume that the profit before promotion is P1 and the sales volume is S1. In the promotion, the profit is P2 and the sales volume is S2. Although P and S increase and decrease in different proportions, the profit per unit of product is decreasing. But as long as the demand for the product is elastic, P2 S2>P1 S1, then the total profit will increase.

(2) Diminishing Margin Effect

During a promotion, as sales increase, the diminishing marginal returns will gradually become apparent. When sales reach a certain level, the costs of product storage, logistics, etc. will be reduced, leading to an increase in final profits.

(3) Other income

Sometimes, the total revenue per unit time from a promotion may not increase, or may even decrease, compared to regular sales. But because there are other benefits, the promotion is still worthwhile. Whether it’s increasing brand awareness, promoting new products, or educating the market, many times the benefits of promotion are hidden outside of the promotion, but such returns are slower and harder to calculate.

2. Market overdraft: the trend of fueling the fire

Even if you have no choice but to do promotions, and even if the promotions are still beneficial to you, you must also be aware of the future risks brought about by market overdraft.

1. Promotion is also known as overdraft

Promotional activities are a form of market overdraft. Consumers' future psychological budget is being consumed now, and the attention they will receive in the future is being harvested right now. Combined with the still hot loan consumption, the market overdraft situation becomes even more severe.

Overdraft means that after customers' consumption bursts out in the present, they may face a situation of less consumption or no consumption in the future, just like farmland will have a period of fallow after the soil fertility is exhausted. However, major businesses will not wait for this "fall period" in vain. The only way is to overdraw the user budget for the next stage again to meet the sales target of the "fall period". This cycle repeats itself over and over again, eventually leading to a "moonlight clan-style market overdraft."

Fortunately, the overdraft situation in the consumer market can be solved by more than just waiting for the user's budget gap to end. In today's situation, the economy is still in the rising stage of development, and customers' purchasing power and desire are still continuing to expand, enough to fill the gap caused by the overdraft of the consumer market.

In the past, the Sixth Plenary Session of the Eleventh Central Committee pointed out that the main social contradiction is the contradiction between the people's growing material and cultural needs and the backward social production. Today, the report of the 19th National Congress of the Communist Party of China emphasized that the main contradiction in society has transformed into the contradiction between the people’s growing needs for a better life and the unbalanced and inadequate development. Regardless of where the final point of conflict arises, the central government's instructions convey the premise that demand is still growing rapidly.

The continuous growth of purchasing desire and purchasing power allows the overdrawn market to be replenished. Just like people's general loan behavior, in the context of inflation, loan consumption actually makes money overall. Therefore, under the current economic conditions, promotional activities do not have much harm to the overall market overdraft.

2. Treat overdraft appropriately

For merchants, choices cannot be made entirely from a macro perspective. The situation is completely different in each different market segment.

For most fast-moving consumer goods, irrational consumption is obvious. When customers' consumption desire expands and their consumption capacity grows, future expected customers who have overdrawn due to promotional activities can again engage in irrational consumption due to promotions, thus being quickly filled.

However, for most durable consumer goods, the situation is different. For products such as cars and houses, individual demand is more easily saturated, and the expected decrease in future customers caused by promotional activities will be more difficult to replenish. After the promotion, the market declined severely and the negative impact was huge. This is also the reason why there are relatively few promotions for cars and houses, and even if there are promotions, the promotion will not be very strong. During JD.com’s 618 event, the promotion efforts for computers and accessories were obviously not as strong as those for other products. This year, affected by market conditions, prices even increased.

Even if the industry is not suitable, some people will still choose to offer low-price promotions, especially some new entrants. In this case, we need to handle it rationally and not rush to follow up, so as not to stimulate greater price competition within the industry. At the same time, when conditions permit, it is necessary to communicate with peers, moderately stabilize pricing strategies, and reduce the impact of market overdrafts caused by unhealthy price competition.

As it stands, even in the case of overdraft, the soil of the market is still fertile. Whether you can grow good crops depends on how carefully you cultivate it.

The author of this article @墨饕 is compiled and published by (Qinggua Media). Please indicate the author information and source when reprinting!

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