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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?

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