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The Case Against Holiday Sales

This time of year, your competitors slash prices to reel in the holiday shoppers. Here's why that's not a game you should play.
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This time of year is a race for retailers. Executives at companies both large and small are battling to get people in the front door and spend their Christmas gift budgets. And the frenzy began well before Black Friday and Cyber Monday. What's the smart operator to do?

Let your competitor win.

That's right, let all that post-Thanksgiving Day traffic go to your competitor. Why? Because the discounting that goes on is a fool's game. As The Wall Street Journal points out, the "holiday shopping season is basically a zero-sum game:"

People spend what they are going to spend. The broad category of department stores and other retailers (such as clothing stores) that make department-store like sales fetched about 21% of their total sales last year in November and December, according to the Commerce Department. The share was the same in 2010, 2009 and 2008. It has drifted down slightly over time: A decade ago, the share was 23%.

This isn't just about retail or holiday discounting. One of the smartest moves you can make is to saddle a rival with the pains and costs that beat down profitability, kill employee morale, and destroy any consumer perception of value beyond discounting. Let them have the business. It may sting in the short term, but eventually you will see these competitors undermine themselves.

Competitive gimmicks usually do nothing fundamentally healthy for a business. Extreme sales make for badly sliced margins, soaring employee costs, and fleeting gains in market share.

But move beyond retail. Every company, no matter what the industry, has the experience of good and bad customers. The good ones are reasonably profitable, have some loyalty, and might even appreciate what it is that you do. The bad ones are ready to bolt at the smell of a slightly higher discount.

Let them bolt. Do a customer segmentation analysis to understand the real profitability and lifetime value of various customers and then stop fighting to keep the ones that actually cost you more than they bring in. Don't send them promotions. Wave them goodbye as they seek other companies in your industry who will make the mistake of thinking that all customers are equal.

Evaluate the full cost of your vendors. The analysis should show which ones promise low prices and more than make up for them with low quality, problems, and lack of available product when you need it. Send them on their way, maybe after dropping some supposed hints about which competitors worry you most.

Then go ahead and fret in public and at industry meetings about the problems you're having. Keep it to yourself that you've bolstered your bank account and your reputation with customers.

IMAGE: AP Photo/The Jackson Sun, Katie Brake
Last updated: Nov 27, 2012

ERIK SHERMAN | Columnist

Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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