Discounts and Sales strategy for your business
What’s your response when asked for a discount? Do you:
- Refuse point blank shouting “not until hell freezes over”
- Immediately fall over yourself in your angst to reduce your prices to secure the business from Mr Curt Price stood in front of you?
The problem with discounts is that they can destroy price integrity with blinding speed. Conversely, they can bring a stampede of buyers through the door faster than just about anything else. In a tough economy businesses often discount their products and services to increase sales. But did you know that a 10% reduction will mean that you will have to find an additional 50% more customers (*) to cover the cost? (I GUESS THAT’S NOT TIME YOU CAN FIND IN AN ALREADY MIND-BOGGLING FULL WORK SCHEDULE)
The advantage of discounting is that it attracts attention and has the potential to get prospects that ordinarily would not buy to try out your goods and services. The hope, of course, is that once they experience what you have to offer that they’ll buy again.
The question is, does it work? And if it does, for whom?
It is widely considered 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. If that sounds impossible look at this example:
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 in pharmaceutical double blind studies were told they were taking a more expensive drug expected and received a better outcome, guests paying substantially higher rates expected a better experience and moulded their assessment to their expectation.
So having now accumulated antsy-pantsy, ungrateful new clients who will continue to screw you for more money off you may then also run the gauntlet with your existing client base. I say this because when they get wind of it (and you can bet your bottom dollar they will) they will inevitably ask themselves why your price can be discounted. If they recently paid full price for a product that is now on sale, they may feel cheated and wonder why they can’t get that price!
Notwithstanding I think that there is always a place for a discount if used as the exception rather than the rule AND if you have valid reasons for it. So let’s have a look at some of the different types:
The “Thoughtful” discount – offering a discount after the first visit/transaction encourages clients who have already demonstrated their willingness to pay full price to come again. It gives you a chance to build up a relationship with this new client – a chance to cosy up and say “thank you”. So after they have brought you their business paid full price for that product/service you could offer them a coupon that provides a discount off their next transaction. You don’t need to offer it again as there will be other incentives you can apply (as you will see when you read on further).
The “Needful” discount – you may want to limit the deal to a certain number of customers, a particular season or time period. For example if you want to put bums on seats of your restaurant on Slow Wednesdays then a buy one, get one free (that has the unfortunate acronym BOGOF) would be to your advantage. It’s a WIN/WIN situation for all concerned.
The “Freebie” – an alternative to money-off and percentage discounts could be free services that you may otherwise charge for e.g.
- a hotel could offer free parking
- a cafe could offer free Wi-Fi access
- a hair salon could offer an extra treatment or a “take-home” styling product
- a central heating engineer could offer a boiler check
So working on the basis of “givers get” then by offering something without demanding anything in return makes people love you that little bit more than your competition.
The Leaving discount – speaks for itself really – great for getting shot of end of line products or to remove the traces of erstwhile suppliers to allow the new sexy ones to move in! Helps you to boost the coffers on a product that was about to be discontinued and your customer bags a bargain!
Bulk buy discount – it’s natural to assume that if someone is buying in bulk (whether that is purchasing a physical product or booking multiple appointments) that it will be cheaper. 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 sceptical or resentful if you give this type of discount. Here both parties gain from cosying up together.
Pre-pay discounts – giving your customers a discount for pre-paying gives your cash flow a shot in the arm and is great for helping you negotiate better deals with your suppliers.
Seasonal sales – ubiquitous for businesses with seasonal slumps as discounts at a specific time of year have few negative ramifications.
So, to discount or not to discount – that is the question?
A good reason for a discount can mitigate damage to overall price integrity, reputation and relationship with both new and regular customers; PLUS it can create the kind of behaviour you want from customers, such as buying now, not later; buying during off-season; and buying in bigger quantities.
If you are using discounts to bring new customers through the door then 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
As with all discounts you need to review the pros and cons before handing out money on a plate. So consider the following:
- What do you hope to achieve by discounting?
- How much business will you now win that would otherwise lose to a competitor?
- How much profit will you forego by selling discounted products or services given that customers who would have paid full can now pay less?
- What’s the benefit to you if someone buys sooner rather than later?
- How will the competition respond to the discount-and how will that affect you?
- How will discounting affect perceptions about the value of your product or service?
- Can you handle the increased volume for (a) the discount offered and (b) servicing the additional customers?
Once you dig deep and find the answers to these questions then, you’ll know if discounting is a good way to increase your sales.
(*) – Information supplied by Robert Craven who states that if you have a gross margin of 30% and you reduce your prices by just 10%, you’ll need to find 50% more customers to balance the 10% discount
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