Offering discounts is a popular business strategy. But is it a good idea?
In our present economy, driven by price hypersensitivity and what the Harvard Business Review calls “the new thriftiness,” marketers are discounting like never before.
Discounting is a risky endeavor. It’s an easy trap to fall into. And one that’s very hard to climb out of.
By offering discounts yourself, you may think you’re building your business. But you’re actually harming your brand value and your profitability.
So, is discounting ever a good strategy? Yes, if it’s done right. Here’s a basic guide to help you do it wisely.
When not to discount:
1. To close a deal with a new customer
Consumers and businesses alike will ask for a discount – in direct and indirect ways:
“I can get this cheaper down the street!”
“Our budget’s really tight this year.”
“Is that your best price?”
“Can you discount it so I can get this approved?”
Do not simply mark down your price to get the business! If a prospective customer wants to buy from you but has legitimate financial constraints and asks for a discount, say “Yes, I’d like to work with you on price.”
Instead of a giving a discount, offer to look at their needs and then at appropriate options.
If you sell a product, is there a less expensive version you can offer? If it doesn’t already exist, can you create alternative products at a lower price point while retaining margin? If you can, then consider doing it.
If it’s a service, can you remove specific features or benefits, reduce the scope of the work, change the terms, increase the lead time, etc. in order to lower the fee?
Customers will appreciate your willingness to work with them. They’ll also appreciate the value of the features they have to forego to get the lowered price. This dynamic often means you end up winning their business and doing so at the initial price quoted.
It’s funny how money can be “found” when a purchase is desired enough. And if the money’s simply not there, you’ve given them options they can afford. If those don’t exist, then refer them on.
2. To secure return and renewal business
These are your existing customers. They are the ones who know you best and presumably, love you most. If you have to discount to secure this business, then something is wrong. They’re either not seeing the value for the investment or they really don’t have the money.
If it’s the latter, and retaining their business is really important, then use the approach outlined above instead of discounting your price.
Remember, once you discount, you’ll have a hard, if not impossible, time bringing fees back to their normal level. However, if you sell a lower-priced option or reduce the scope of the project to meet the limited budget, customers will be more apt to return to the full-priced option when money is available.
3. To undercut your competition
Once you discount to undercut your competitors, you’ve begun a battle of diminishing returns. You discount, then they discount, then you discount more, and so on. This is how you turn yourself and your offering into a commodity. No longer is your product or service about unique benefits. It’s simply about price. And anybody can beat you on price.
With this approach, you may win business, but at what cost? You’ll have more customers, but they’ll be price sensitive (not in the best way!) for ever-shrinking margins. That’s not a desirable or sustainable way of doing business.
4. To market to high-end consumers and business accounts
If this is your market, then you know that your clientele isn’t shopping based on price. They may signal that they are, but they really aren’t. The rich-and-powerful love to negotiate. Why not? It’s a kind of game. Don’t be offended. You can play along without playing by their rules in order to win the business. If you discount, you cheapen your brand and may turn off the very customers you most want to attract. Stand by your value and your price.
5. To sell products or services that impact health, safety and/or security
When consumers and companies are buying things that affect their health and well being, are they really going to choose the cheapest solution? Think about it. If you’re looking for a doctor or dentist, what’s more important: price or patient reviews? What about securing your data: price or years of experience? Price could factor into the decision, but it won’t lead the way. So why would you lead with a discount?
6. To secure a long-term contract
Businesses sometimes offer a discount to give clients an incentive to sign long-term contracts. I used to think this was a good idea. But I’ve seen how easily contracts are broken these days. Better to maintain your margin now then trade it off for business you may lose before the end of the contract.
So, in a price-sensitive economy, how do you stay competitive if discounting is so risky?
When to discount:
1. To draw in new customers
If you’re launching a new business and need to build your customer base, consider an introductory offer. This is a discount or special offer on a first-time purchase. It’s a way to help customers overcome their initial reticence to sample your product or service. Only offer it once and for a limited time. You don’t want to establish a pattern of discounting, like many major retailers, or customers won’t want to buy anything full-priced. Just ask Macy’s about the detrimental effects of over-discounting.
2. To encourage a larger purchase
If you’re proposing multiple products and/or services and you’re not sure your customer will buy them all, you can offer a small discount to encourage a larger commitment. Retailers will offer two-for-one specials to encourage that extra sale. Just make sure that the additional margin you make with the larger purchase more than covers margin lost to the discount. Otherwise, it makes no sense.
3. To move old inventory
If you have out-of-date inventory that is more expensive to keep in stock or otherwise dispose of, then offer a discount!
4. To build your brand and integrity
There are clever ways to discount that promote your brand and business integrity. If you consider yourself a “green” business, you may offer an incentive that conveys this message. Peet’s Coffee gives a discount when you use your own cup and Apple offers a discount on a new iPod when you recycle your old one. If you must discount, find a way to use it to strengthen, not weaken, your brand.
If you respond to market conditions by slashing prices, you will cut an enormous hole into your own business. Follow these guidelines for smart discounting strategies and you won’t sink your own ship.