From Chocolate to Black Friday: How Discounts Rewire Demand

This article is really about Black Friday, but it starts in a very different place.

I recently came across a very interesting article about the price of chocolate, something that is very dear to my heart. It’s by Peter Alexander, Professor of Global Food Systems, University of Edinburgh, and you can read it in The Conversation here: https://theconversation.com/the-cost-of-chocolate-is-soaring-but-blaming-cocoa-prices-doesnt-give-the-whole-picture-272315

The short summary is this: the price of chocolate has risen far faster than inflation, and the price increase is not simply explained by raw material costs. Peter uses Cadbury Dairy Milk 200g bars as an example – since 2021 it has shrunk from 200g to 180g (shrinkflation), while at the same time the price has gone from around £1.86 to £2.75.

Cocoa prices spiked massively in 2024, rising to 4x the long-term average due to poor harvests, disease and extreme weather, though it then fell back to 2x. Other ingredients, such as sugar and milk powder, have also increased but by a smaller amount. Because the ingredient costs are a small fraction of the final price, though, the increases are not enough to account for the current price of the chocolate bar.

You would think, as a pricing guy, I would be happy with a manufacturer and their retail chain finding ways to improve margins. And you would be right, if that was the whole story.

The problem that chocolate bar manufacturers have with me is that they have trained me to only buy chocolate at a certain price, and that’s important because I must be a significant fraction of their revenue. How did they do this? By discounting.

All the chocolate I like seems to regularly be on offer. So if I ever see it at full price, I just wait, I know it will soon be back to a price that’s less than £1 per 100g. So now, even though I can afford 75g of Cadbury’s Snow Balls at £2.00 or more, I wait until boxing day and buy rather a lot of bags at 83p instead.

Ok, I’m probably a bit weird when it comes to chocolate, but this is exactly what retailers are doing each year by running Black Friday sales. And the evidence bears this out.

More and more often consumers are postponing October purchases until the deals start, or are buying what would have been November/December purchases. Reports by PwC and the British Retail Consortium show that overall sales volumes across Oct/Nov/Dec are largely the same as they would have been without the sales. In other words, in October many who need to buy something wait for the deals, and then around 25% of shoppers use the event to complete their Christmas shopping early.

Around 68% of shoppers plan to buy something for themselves (PwC), though again all of these sales could be postponed or pulled-forward purchases.

There is some evidence for small amounts of incremental sales. Some very price conscious shoppers might buy something they could not otherwise afford. Also, Ometria reports that around 45% of sales come from new customers to that brand/channel, though they were probably in the market anyway and just switched brands. Natalie Berg’s analysis suggests that total net sales increase might be around 7%.

So largely retailers are training customers to wait for the next discounting deal. 

What does that do to profitability?

There is significant gross margin erosion required to run the deals. Aegon’s Money Mindshift reported that 58% of Black Friday shoppers later regretted the purchase, so there is a negative impact on the brands. Operating costs go up to manage the artificial peak in trading. Around a third of shoppers expect to return items after the sale (Tink, 2023), so returns increase. During the sale period there is increased competition for clicks, so cost per click (CPC) for online advertising goes up.

Let’s lay this out really clearly.

In Oct/Nov/Dec retailers are:

Training customers to wait for a deal, but not really getting more total sales;

Are getting much lower gross margins;

Are spending more in costs to manage the surge;

Are spending more in costs handling returns;

And are probably damaging their brand in the long term!

What to do about this?

First, some retailers are opting out of Black Friday altogether. Retailers like Next, Patagonia, and Primark, etc. Many smaller independents simply don’t bother. If you’re not participating, then you’re not giving margin away, and you are not training customers to wait for the annual sale. 

Second, it doesn’t have to just be about a price discount. Apple participates in Black Friday, but excludes the most popular products, and instead of a discount offers an Apple gift card with a purchase. That means two things: gift cards are often not redeemed, so they didn’t actually give anything away; and if it is redeemed, the customer has to come back to Apple to use it.

Third, it can be a completely different incentive. Ikea run ‘Green Monday’ events with plant-based eating initiatives or Buy Back & Resell promotions to appeal to the sustainable-conscious customer. Patagonia similarly promote used gear and repair.

Fourth, some retailers use this time of year to run loyalty programs – perks, early access to special products, loyalty-based discounts, recommend-a-friend incentives, etc.

There is one final thought I would like to add, and it’s with regard to the 45% of sales being to new customers. We didn’t discuss Customer Lifetime Value.

If you run a Black Friday event, get 45% of sales from new customers, and do nothing about it then you have wasted all the money it costs to participate in the event. If, on the other hand, you have a world-class activation programme: your system clearly identifies new customers, you have a workflow to build contact with them and find out more about them, you blow their socks off with how easy and painless it is to return something if they need to, you open an account for them if they checked out as a guest, etc; then it might be worth the lack of an increase in sales during the period despite the higher costs, because you will make it up in sales to those new customers in the future.

The bottom line is this. Don’t just do Black Friday because everyone else does and you think “they must know something we don’t, surely it must be beneficial to the business”!

Instead, analyse it. 

Either do things in a different way; or do it but make sure you make those new customers stick; or don’t do it at all.

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