If you're the type of person who shops only sale prices, think about this: Would you want you as a customer in your own business?
When I was growing up, my entrepreneurial family wasn't motivated by sales. I was taught to not get excited about sale prices because nine times out of 10, you can always buy the item for that price. This has been a good lesson: Sale prices are often nothing more that statements of what you should really be paying for something.
And that is the downside to discounts: They can destroy price integrity with blinding speed. On the other hand, they can bring a stampede of buyers through the door faster than just about anything else.
That's why business owners should have an uneasy relationship with discounts. They can be a destructive force, yet an effective way to drive sales. Most business owners use discounts too casually, thoughtlessly and often because they like the positive effects and do not fully understand the negative effects.
Related: The Downside of Social Coupons
Consider: Is price your only competitive advantage? The thing to keep in mind is that offering discounts is a form of selling on price. When you offer a discount, you are taking the focus from the value you provide and placing it squarely on your price. There is no way to escape that.
To maintain higher prices, you have to instead be adept at selling value. Discounts erode your ability to do that. Any reduction in prices can damage your price integrity. Later, getting the same customer to stop thinking about price and re-focus on value can prove difficult.
Not only that, studies show that discounts actually reduce the effectiveness of whatever is being discounted. In a buyer's mind, the discounted offering literally does not perform as well as it did at full price. That sounds impossible, but double-blind studies using prescription drugs and over-the-counter health products, cosmetics and other products have shown this to be true.
A study conducted by a group of resort properties matched their most glowing comment cards to guests paying full price or nearly full price. The most critical comment cards came from guests who had knowingly bought at deeply discounted rates. Part of the explanation for that may be that the discounted rates drew a different type of customer. But it also suggests that, in the same way people told they were taking a more expensive drug expected and received better outcomes, guests paying substantially higher rates expected a better experience and molded their assessment to their expectation.
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Ironically, discounts can also lead to dissatisfaction in your clientele. Discounts can lead your clients to ask themselves why your price can be discounted. They look at the price they have been paying, and then look at the discount and smell a rat. They wonder why they can't get that price some other time. If they recently paid full price for a product that is now on sale, they may feel cheated.
This is why it's imperative that you always give a good reason for a discount and that your rules are solid. Unless you plan to compete on price continuously, you can't have predictable sales or flexible terms. If there's a sale, it must be for a specific reason with specific rules.
There are upsides to offering discounts. They can be a great way to modify behavior. Volume discounts are an example of this. They make sense in the buyer's mind. We are trained to expect that the more we buy, the cheaper things will get. So customers are generally not skeptical or resentful if you give this type of discount.
Other good reasons to discount include:
- Prepay discounts. Prepay will help to keep your accounts receivable current.
- Bundled deals. These discounts can help you increase your transaction size.
- Seasonal sales. Businesses with seasonal slumps can disclose that as reason for discounts at a specific time of year with few negative ramifications.
A good reason for a discount can mitigate damage to overall price integrity, reputation and relationship with regular customers, and can create the kind of behavior you want from customers, such as buying now, not later; during off-season; and in bigger quantities.
As for using discounts to bring new customers through the door, have one product or service that's designed to be the one thing you use to drive traffic, whether periodically or perpetually. This way, you isolate the damage discounting will do to your price integrity. You can then, if you wish, preserve full, fixed pricing for all other products and services.
Related: Groupon Now and the Rise of the Real-Time Deal
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Comments:
People just love discounts and that's why they work. However, the company that is giving the discount has to be careful about it and ensure that they have covered all the bases before giving any promo including discounts. For instance, we had a promo in the Philippines that gave away airplane tickets to those who could show five credit card receipts showing a certain amount. People went to casinos and charged casino chips to their credit cards, and then changed back the chips for cash a few hours later. They used the credit card receipts to get the airplane tickets. That's the case of a promo going bad on the company.
There's some things in this article that I believe ring true, however some of the logic is flawed. The main point that this brings to mind is the type of product you are offering. This doesn't ring true across the board for every product. If for instance, you're selling a brand of something, as a consumer, they naturally assume that the first time it goes on product, its to hook you in, its considered the trial offer. In this article, it says that the discount method hinders pharmaceuticals, that doesn't make it true for every product. It is common knowledge that in that market, the name brand works better than the generic, and in cases of pains, you can't afford to have it not work. That doesn't mean that your putting a sales price other products, especially a name brand product has the same effect. Especially if you're limiting your discounts, such as 1 particular item when everything else remains full price. Especially in the case of a restaurant, if one thing were a value price, the customer assumes that you have overstock of particular ingredients, not that the one dish is inferior to the rest. Also, in the same logic, if you give an explanation to your discount (IE. Customer appreciation day, or Anniversary Sale, or End of the Year Liquidation). The customers tend to believe your reasoning and avoid assuming most anything else.
From a professionals stand point what this article is talking about makes total sense. I have tried it and yes the only thing it did was bring in a client base that we did not want. Becuase the next year when we did not give the discount alot of them did not show back up. I am sure they just went to the next office with a discount.
This brings some interesting thoughts to my mind. I'll be re-thinking some future strategies. Thank you.
That's a great idea, and goes more toward a charity exercise rather than a discount. Your full paying clients get a benefit other than your product by paying full price. Good Job!
I've always been of the belief that by providing discounts and coupons (beyond a certain point anyways), you are undermining the value of your product. I rarely advise clients to offer discounts freely.
I think it's possible to offer discounts in ways that protect the bottom line. For example, when I was growing up, I was treated by a doctor who donated one half-day a week, every week, to a free clinic. I always admired him for this, and wanted to apply his principles to my own business (fitness training). So I decided that for every nine clients who pay full price, I will work for free or on a sliding scale with one low-income client who would not otherwise have access to a trainer.
Good article and supports my selling practices of not offering discounts. 1. If the customer ask for a discount, they can't afford my item. (I make custom, high end pillows and sell them online). Once the discount is agreed upon, they then want to know what else could they get for the cost. So they will continually bombard me for "free" quotes. In the end, they NEVER buy. 2. The few times I have discounted slow sellers from my inventory, the buyer wanted to return the item, usually for buyers remorse. It doesn't match their furniture, or the color is darker, lighter, brighter, sunnier..... then what they expected. Since there is little or no profit in these items, the returns or ill will on the customer's part take more time and money. In the end, I would rather donate slow sellers than deal with the complaining customer, and I already know the customers wanting high end pillows discounted, can't afford them so I politely tell them that I won't be able to take their business.
Excellent article. McKinsey research has shown that more than 80% of companies could increase profits by selectively raising (or not dropping) prices. My one disagreement with your perspective was the proven benefits of using a promotional sku to drive traffic...but then you covered that in your last paragraph. Well done! p.s. Here's a link to several McKinsey articles on the subject. http://goo.gl/yL4O7