How and When to Discount
At first glance to the average Business Owner discounting doesn’t seem complicated. But you are much savvier than the average Business Owner and you realize that there are pitfalls in discounting. Here are a few, perhaps more than just a few, so please bear with me:
- Erosion of Profit Margins – Besides the fact that you are making less per unit, you are probably spending marketing money to tell people about the sale or discount. Unless you have very high margins to begin with this can get you in trouble.
- Brand Devaluation – Frequent discounts can lead to a perception that the product or service is of lower quality or not worth the full price. Constant discounting can dilute the brand’s perceived value, making it difficult to sell at full price in the future.
- Customer Expectations – Customers may become conditioned to wait for discounts before making a purchase, reducing regular-priced sales.
- Decreased Loyalty – Rather than building loyalty, discounts may attract bargain hunters who are not loyal to the brand and will move on to the next deal.
- Competitive Pressure – Engaging in frequent discounting can lead to price wars with competitors, which can be detrimental to all players involved.
- Unsustainable Practices – If competitors engage in aggressive discounting, it may force businesses to follow suit even if it is not sustainable long-term.
- Inventory Issues – A successful discount campaign can lead to stock shortages, leaving regular customers frustrated if they cannot get the product they want.
- Overstocking – Conversely, businesses might overstock in anticipation of a successful discount campaign, leading to excess inventory if the campaign does not perform as expected.
- Customer Segmentation Problems – Frequent discounts can alienate customers who previously bought at full price, making them feel they overpaid.
- Inconsistent Customer Experience – Offering discounts to only new customers or select groups can lead to dissatisfaction among existing or loyal customers.
- Impact on Long-Term Growth – Over-reliance on discounts can result in a focus on short-term sales rather than long-term growth and customer relationships.
- Undermining Value Proposition – If the business’s value proposition is based on quality or uniqueness, frequent discounts can undermine this positioning.
- Financial Mismanagement – Miscalculating the financial impact of discounts can lead to significant losses. Businesses need to ensure they understand the break-even point and potential sales volume increase needed.
- Hidden Costs – Discounts can sometimes lead to hidden costs, such as increased customer service demands, higher return rates, and logistical challenges.
- Legal and Ethical Considerations – Misleading discount promotions, such as inflating original prices before applying a discount, can lead to legal issues and damage the business’s reputation.
- Fairness – Offering discounts to only certain groups of customers (e.g., new customers only) can raise fairness issues and potential backlash from other customer segments.
What is a Business Owner to do?
Using discounts should be a two-way proposition. Let me repeat that, discounts should be a two-way proposition, in that for you to give a discount to the customer, there should be something in it for the business.
Reciprocity examples could be:
- That you are slow on Tuesdays and if the customer can change their buying habit to come in on Tuesdays you will provide them with a discount.
- Or, if the customer buys five, or spends a lot, then you might provide them with a discount.
- Or if they can bring you a new customer, they get half off their next purchase.
- Or discounts for “liking, or sharing” on social media.
When you give discounts just for the heck of it, or worse when you are having financial difficulties, that is when the problems previously mentioned can really get you into trouble. However, when there is reciprocity, few full price customers can come back and demand the discount, because they didn’t provide the benefit to the business first.
Another thing to consider is to provide “Added Value” rather than dollars off. In a customer’s mind a BOGO or buy one and get one for free sounds like a 50% discount. Let’s imagine that you are overstocked or closing out a product. You can take a compete loss or at least make yourself whole with a BOGO sale. Even better when selling a service and your team is sitting idle because of lack of business. A BOGO or free gift with purchase sale can be made even better when adding a stipulation such as “for purchases over $XX.xx amount, or Tuesdays only. The point with value added specials is that the added value might have a $20 value to them but cost you less than $10.
Also be sure to:
Carefully plan and analyze the impact of discount campaigns, considering both short-term and long-term effects. Ensure transparency in discount offers, including terms and conditions, to avoid customer dissatisfaction. Use data to target discounts effectively without alienating loyal customers or devaluing the brand. Continuously monitor the performance of discount campaigns and be prepared to adjust strategies based on data and feedback. Consider other incentives besides discounts, such as loyalty programs, exclusive access, or value-added services, to attract and retain customers.
Every business has is own challenges and its own constraints as to what makes best sense for the business when it comes to discounting. So rather than just having a sale for the heck of it, please think strategically and know your costs.
Next week we will talk about “Yield Management”, often called Revenue Management which is used for limited availability commodities and services. This topic is related, and for many businesses should be part of their discounting strategy.
