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The Problem with Discounts

There is no question that lowering prices can bring in more customers and increase your sales. In the long run, though, it will hurt your business.

How Are You Training Your Customers?

There is a local business that always offers a 20% discount to any person wearing team colors the day after the local football team wins a game.

This sounds like a great deal if you are a customer, and it is. If you plan to buy something from that business it is obviously worthwhile to wait and see if the football team wins.

It is easy to imagine the monster sales that happen the day after a victory. What about the rest of the week, though? Clearly this promotion deflates sales on the other days of the week. The sales after a victory may be substantial, but do they make up for the lower sales the rest of the week?

Consider the profit margin on a sale. Let’s say, for example, that after factoring in overhead costs like rent, employee wages, product costs, insurance, and so on the typical profit on a product is 40%. This is a totally reasonable number for many business.

This company, while offering a 20% discount, has to DOUBLE their sales to make up for the lost profit from the discount. And then they have to make up for the lower sales the rest of the week.

They have to do an awful lot of work just to get to the point where they are showing a gain.

This is all because the business has trained their customers to wait for a discount before making a purchase.

The Expectation of Value

If we are going to “train” potential customers to expect something from our business it should be the expectation of value rather than the expectation of discounts.

How often do you turn on the television and see an ad promoting a massive sale on fine luxury car brands? You cannot go a single commercial break without seeing one of these for low- or mid-priced brands, but rarely do you see a discount ad for a luxury brand.

The customers who buy the high-end cars are looking for the best in style, product, service, and reputation. They are willing to pay a price equivalent to the high value provided by the car. A discount may even cheapen the perception of the product and make it less desirable.

This is the way to position a business. Provide the best products in the best possible way. Treat people well, go above and beyond, and wow them. Do such a good job that the customers cannot imagine dealing with the cheaper, crappier competitor just to save a few bucks. These are the customers that will spread the word about your business and do your advertising for you.

Fewer Customers, Better Customers

High-end companies that offer great products and services (and charge higher, un-discounted prices) are going to get fewer customers. That is ok. They don’t need as many customers to make the same profit as the company who is discounting.

And let me tell you a secret.

In my years of managing a specialty running store, which sold running shoes for as much as $170, it was always the customer that came in asking for old models at a high discount who was the worst to deal with.

The customer who asked for a $20 pair of shoes was rarely satisfied if we did manage to find one. They were the pickiest about the colors and styles on the shoe, and they expected more performance and durability out of the shoe.

My experience talking to others in various industries has reinforced that this principle spans industries. The customers shopping for discounts are often the most difficult customers to deal with.

When Giving Discounts Can Work

With all of this having been said, there are certainly times that it does make sense to offer a discount.

Rare, Limited-Time Deals or Slow-Season Deals

Occasional deals or coupons that are only offered for a limited time can work well to increase business, especially during your slow times of year.

Most rental companies will have slow times of the year. Depending on your industry, it might make sense to offer a short-term deal (like a “Black Friday” deal), but it could also make sense to lower your prices to an off-season rate. The industry that you are in, and how much of a sales dip you see during the slow time of year, will affect the type of off-season offerings that work best for your company.

One-Time Coupons

A great way to reward customers is with a one-time coupon. In this case you would offer the customer a percentage off of an item or an order for signing up for your email list, referring a new customer to your business, or performing some other action that is favorable for your business.

These coupons are for one-time use and should only be used by the customers who earn them.

In Short

The right pricing and discounting strategy can set your company apart from the competition. What discounting strategies have you tried, and how have they worked out for your business?

Setting a Cancellation Policy for Your Rental Business

Imagine this:

You are loading up the truck to make a delivery for your rental business. Moments before you leave a call comes in from the very customer you are about to deliver to, and they want to cancel their order. Maybe you are delivering chairs for an outdoor wedding, and poor weather has forced them to a different venue. Or perhaps they ordered a tent to protect a party in case it rained, and it happens to be a beautiful sunny day.

What do you do?

Without a policy in place you can lose a lot of sales this way. It is essential to craft a deposit and cancellation policy for your rental business so that you have something to fall back on when these situations arise.

Deposits

First, it is wise to collect a deposit from the customer in order for them to secure their order with you. This gives some assurance that you won’t lose everything (namely, the ability to rent out your product to anybody on that day) if the customer pulls out at the last minute.

The balance can then be paid when the products are delivered.

The right deposit will differ from one industry to the next. You could ask for 25% of the total price up front, or even for 50%. You could also test different deposit percentages over time to see how customers react. 25-35% is a good, safe range that gets the customer to commit without scaring them off. They will see it as a risk to commit too much money before the product is delivered.

Set a Cancellation/Alteration Deadline

Changes or cancellations to a customer’s order in the days leading up to the actual rental period can hurt your business. You may not have time to get a cancelled item rented out with just a few days’ notice, so you lose the potential income from that product.

Set a deadline for order alterations and for outright cancellation. A week or two before the delivery date is a good range. It could even be a month, but this is getting to be pretty far out from delivery day. A couple of weeks should be sufficient notice if the customer needs to make a change to their order. Setting a deadline too far out from the delivery date transfers too much risk to the customer and may prevent them from doing business with you at all.

If the customer cancels before the deadline they should forfeit their deposit, but not be required to pay the difference.

If the customer cancels after the deadline they should be made to pay the full rental price because it is too close to the rental date to have get the product rented out again, so the customer is preventing you from making an income with that product on the day they had originally reserved it.

When the Weather Forces Cancellation

The weather can cause a tricky situation in some industries. A tent rental company should make a customer pay full price if they cancel at the last minute due to beautiful weather making the tent unnecessary.

If the weather prevents the setup of the tent by your company (due to lightning or very strong winds) you may choose not to charge the customer the full price. This is a difficult situation, since the customer is not causing the setup problem in any way.

This is the type of situation that is much smoother with a clear cancellation policy. You can decide ahead of time to charge full price, even for weather cancellations. You could also decide to only charge the deposit in this instance so that your company doesn’t lose out on all of the income from the transaction but the customer doesn’t have to pay full price for a tent that they cannot use due to factors outside of their control.

 

Pricing Rental Products, Part 3: Pricing Strategies

In Part One of this series on pricing rental products we talked about determining the minimum price to charge for rentals.

In Part Two we talked about how prices affect the perception of your business in the market.

Now, let’s talk about some pricing strategies that can be used to both add value for your customers and increase your profit. Even if you already have an established rental company these strategies can be used to take your business to the next level.

Pricing Strategies

Add-On Strategy

A great way to both offer a low price on a popular item and maintain a healthy profit is to price add-on products strategically. The concept here is to price a very popular product on the low end of the market’s price range but make up for the loss in profit by charging a little more for products that are commonly rented together with the main product.

An obvious example of add-on pricing in a sales environment is the computer printer industry. Companies will practically give away their printers knowing that the customer will be buying high-profit extras such as USB cables and ink cartridges as a result of buying a printer.

The low up-front cost leads to stronger profits over time because the low-priced product gets customers to choose to do business with you, and by default they buy the higher-profit products from you as well.

The same can be applied in a rental business. Say that you find that many of your customers, when renting a tent, will also rent sidewalls to enclose the tent or lights for inside the tent. Your company may be able to offer the tent for a lower rental price by increasing the profit margins the sidewalls and lights.

Losing Money to Get Business

A similar strategy to the add-on pricing strategy is referred to as the “loss leader” strategy. This is a temporary strategy that involves selling a product at such a low price that you are actually losing money on it, but it leads extra customers into your business to spend money on other products.

It only makes sense to sell at a loss for a short period of time, so you might use this pricing strategy as a promotion to get customers when you are first starting your business, or during a slow time of year.

Grocery Specials  by Taber Andrew Bain CC BY 2.0 via Flickr

Grocery Specials by Taber Andrew Bain CC BY 2.0 via Flickr

This is a common strategy at grocery stores. They will advertise one or two products for an exceptionally low price that cannot be found at other stores, because it is a money-losing product at that price. Customers see the ad and come in to get the great deal.

While in the store, the customers notice other great deals and remember products that they need to buy. In the end the store ends up profiting more from the extra customers and selling more of other products, even while taking a hit on the profit of the marked-down item.

Reward Customers for Larger Orders

In our business the primary product was fold-away picnic tables that rented for $15 a day (at that time). Our average sale was for 3 picnic tables for one day, a total of $45. Many customers would also add an $8 banquet table to hold their food for the party buffet, leaving an order total of $53.

We managed to increase our average sale by offering a free banquet table for every four picnic tables rented.  This worked for a couple of reasons.

  • The customer often looked at this as spending only $7 to get an extra $15 picnic table.
  • The company was looking at it as getting paid extra to include a less-popular item for free. Also, many customers bumped up their orders by multiple picnic tables just to get the free banquet tables, so average sale prices went up noticeably.
  • Everybody gained value, and everybody won.

Another Illustration

When you buy a restaurant gift card around Christmas time there is usually a deal, such as “buy $100 in gift cards get a $25 gift card free!” This is a brilliant marketing idea for restaurants.

Why?

In this deal you can assume that the restaurant’s typical gift card sale is around $50. By giving away $25 in gift cards for every $100 they still manage to raise their typical gift card sale to $75 (when you account for giving away $25). The restaurant increases their average sale by fifty percent and you get a free meal out of it, so everybody wins.

Charge Less for Longer Rental Durations

The longer an item is rented out, the better the deal you should give the customer. This is a common business practice, and it makes sense. Your product is not going to make any money sitting in storage, so renting it out for a longer period of time is saving you hassle. It is a lot easier to rent out one product to one customer for three days than to find three customers to rent the product for one day each.

The level of discounting depends upon your product and the market that you are targeting, but the general idea is that a customer who rents a product for an entire week is paying less than seven times the daily rental price. You might give them a half day or full day free for renting your product for an entire week. This can help to bring in more money up front and it increases the percentage of the time that your  product is being rented out.

Are there other pricing strategies that you have seen or used? Share them in the comments below!

Pricing Rental Products, Part 2: Perception of Your Business

In Part One of our series on setting a price for rental products we looked at how to find the minimum price that you should charge in order to at least break even between what you spent to buy the product and the income you receive from renting it out.

Now that you have determined your minimum price point, think about how your prices will affect the perception of your company by customers and also how it determines the type of customers you interact with.

Common wisdom says to price your products lower that your competition to attract more customers. This might be the best idea in some situations, but not in all.

How Do We Compare to the Others?

Soon after we started Picnic Table Rental a couple of competitors showed up offering the exact same products as our company. We quickly realized that our prices, and the services that were included in the price, were going to be very important in setting our company about from the others.

How did we do this?

First we figured out what the direct competitors were using for rental prices on similar items and positioned ourselves against them.

Determine Competitor’s Pricing

Dig around online and see if you can find prices for direct competitors. If you cannot find prices online (which is likely, because most companies prefer to get you on the phone to discuss your needs) try calling them up and asking them about their costs as any potential customer would. It will be helpful to know the highest price, lowest price, and average price of competitors in your area.

Local Comparisons Are Best

You may have to look outside of your area for comparable companies in order to determine typical prices. Keep in mind that there can be dramatic variation in prices depending upon your location and the demand for the product.

As an example, if you would like to rent a stand up paddle board for a day on the lake you will only pay $9 per hour in some parts of the country, but others area have a typical charge of $45 per hour for the same product. This is why the best price comparison is with similar companies in your region.

When we started Picnic Table Rental, before we had competition, we were able to compare prices to a company that had operated in our region in the years previous. We also looked at similar companies in other cities within a couple hours of our market and kept our prices within the same ballpark range as theirs.

When direct competition showed up in our market we had to decide how to price our products in relation to theirs.We found that the number and type of customers that we interacted with was related to how our products were priced compared to the competition.

Perception of Your Company

Low Prices and Company Perception

Let’s say that you price at 30 percent lower than the lowest-priced competitor. Does this indicate that your service is a great deal, or does it indicate that you provide lower-quality service with cheap products and fewer perks? You may be perceived as a great value, or you may be perceived as the low-end, low-service company in the market.

Low-end companies are not able to offer as many extra services as the high priced companies (maybe high-end companies can offer free setup and delivery, but you cannot, for example) and you will have to serve more customers to make up the lost profit that higher prices would bring.

If you go with the low-price strategy it is important to brand your company as the “best value” company for what you are offering. Your cost of doing business must be low, but the value of the service that you offer your customer needs to be more than what is expected for the price. Customers should be pleasantly surprised by their overall experience with you or you will have a reputation as the cheap and crappy company that offers the lowest prices.

Think about your everyday decision making. Do you typically book the cheapest hotel room in a city, or the cheapest airline? Most people go with at least the second-cheapest option to avoid a dirty hotel or a barely-safe plane unless the cheapest option also has a reputation for great service. The perception of quality is a battle you will fight if you price your products on the low end.

Low Prices and Customers

Another consideration is the customers that you will interact with. Experience both from running a rental business and a retail business has shown me that customers who want the cheapest price are usually the most difficult to deal with. You might expect that a customer paying $150 for running shoes would be much more picky than a customer who comes in to the store with a budget of $50, but it is exactly the opposite.

The customer who is willing to pay more is generally one who understands the value of what you are offering, and they are willing to pay for that value. The customer who comes in with a very low budget may not understand that value, and they just want a product for the lowest price.

Lowest-price customers can also be more difficult to work with because may not trust your advice, seeing you as a salesperson trying to make an extra buck, even if you are simply trying to find the right solution for their needs. You are trying to get them into a shoe with the right type of support, and they simply want a shoe that is half-off, even if it is not the right shoe for their feet.

In many ways it can be more desirable to find and work with one high-paying customer than with two or three low-paying customers.Pricing low is not always a bad idea, but you should be aware that it does come with its difficulties.

High Prices

Pricing higher than your competition may give the impression that you offer high-quality service and products. When faced with a variety of options most customers will assume that the most expensive is the highest quality.

By pricing your products on the high end, and providing great service to match the price, you can establish the perception of your company as the expert or leader in the market. When a customer looks at the options they will ask which services the other companies are not offering to get their prices lower than yours. This is a great thing, because the customer is using your company as the standard by which to measure the competitors.

The difficulty with higher-priced products is finding customers who are willing and able to pay the price. You must be able to educate the market on the need for and benefit of your high-priced product. You will have to explain to customers the benefit of paying the higher price to work with you, and the customer needs to be able to trust you or she will not be able to justify paying a premium to do business with you.

On the bright side, higher prices with a stronger profit margin mean that you will not need to serve as many customers as the lower-priced companies to earn an equivalent profit.

How We Managed Perception

At Picnic Table Rental we actually priced our main product, picnic tables, on the low end of the price range compared to similar companies. We differentiated our company by offering many related products that our competition did not have, such as tents, banquet tables, and chairs, and this helped to make up the difference in lower picnic table prices.

We also utilized some pricing strategies that increased our average sale and made our customers happier.

In Part 3 of this series we will take a look at various pricing strategies you can employ to enhance both your sales and the customer’s perception of your company. 

Do you have any interesting experiences dealing with companies that offer very high-end or low-end services? Share them in the comments below!