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The Dark Side of Discounts

Why sales and discounts can cause damage and how to offer breaks without devaluing your products.

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.

Related: When a Groupon Promotion Went Wrong

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
 

Dan S. Kennedy is a strategic advisor, marketing consultant and coach in Phoenix. Jason Marrs is a pricing and marketing strategist who coaches entrepreneurs and professionals in overcoming price reluctance and resistance. He is based in the New York City area. Kennedy and Marrs are the co-authors of No B.S. Price Strategy from Entrepreneur Press.

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