It's a story any small retailer will immediately recognize. When you first open your store, you're happy to give discounts to your close family in recognition of their support. You also include a few close friends in this policy, repaying past favors by giving them special deals on their occasional purchases.
However, it rarely stops there. It is amazing how large your ‘family’ becomes when you open a store. Soon enough, word of your generosity gets around, and it seems that every friend of a friend now expects special treatment as well. Clearly, this can't be allowed, but what sort of limits should you set on a friends and family policy? Or should you even have one at all? Here are some pointers to help you decide.
Four Reasons to Have a Friends and Family Discount
1. Offering discounts to family and close friends is a straightforward way of thanking them for their support in the past. However, this of course becomes harder to justify the less close individual friends are.
2. Offering discounts helps to build goodwill. Your friends and family can be powerful advocates for your business, spreading the word through their purchases and helping to boost regular sales.
3. Discounts can help keep your stock moving, easing your cash flow and building better relationships with suppliers.
4. Any slight increase in trade that the discounts bring can encourage regular sales by making your shop look busier and more popular.
Four Reasons to Avoid Discounts
1. Smaller businesses are usually on tight margins, and if a large proportion of your trade falls under your discount policy, you may need to raise regular prices to compensate. This is the wrong direction to take.
2. If it becomes widely known that you offer discounts, not only will some people feel excluded and resentful, but even those who don't expect a discount can feel they're being overcharged when paying the full price.
3. In some locations, particularly smaller towns or districts, you may know the majority of your customers to some extent. Where do you draw the discount line?
4. Depending on your niche, some suppliers may have strict limits on the number and size of discounts you can apply to their products. Keeping track of this is an unnecessary headache.
Clearly, deciding whether or not to have a discount policy isn't straightforward. But if you choose to do so, what rate should you set it at?
Any discount which means you're effectively selling at cost price is a very bad idea. Even discounted sales need to include a margin for running costs such as lighting, staff payroll, insurance, and so on - and that's before you even think about taking a small profit to put food on your table.
Consider setting guidelines which might restrict discounts away from new merchandise and services. It can help keep your older inventory moving while still offering your friends and family a courtesy discount. Do not be afraid to be firm in enforcing usage. You can utilize your POS system to preset your family and friends with the discount of your choosing. Depending on your margins, 10-15% is a healthy discount which benefits the recipient without harming you too much. It's a good idea to set guidelines and track discount sales as a separate demographic group on your point of sale system, so that you can see exactly what it's costing you each month or year. The figure may surprise you.
When it comes down to it, you need to keep your business afloat and profitable. Offering too many discounts can risk this, and so if you choose to run a family and friends policy, it should be closely monitored and kept on a tight leash. Be clear and up front from the beginning on who will qualify for the F&F discount. Don’t feel pressured to provide discounts to your great uncles second cousins wife. If it ends up costing you too much, real friends and family will understand if you need to put an end to it.
