Introduction
Discounting has long been a topic of debate among businesses. While it may seem like an attractive strategy to drive sales and increase profits, discounting should be approached with caution. In this blog post, we will delve into the intricacies of discounting, exploring when it can be beneficial and the potential drawbacks it carries. By understanding the nuances of discounting, you can make informed decisions for your business.
The Benefits of Discounting
While discounting is generally frowned upon as a long-term strategy, there are specific situations where it can be advantageous:
Clearing Unsold Inventory
If you have products that are nearing expiration or becoming obsolete, discounting can help you move these items off the shelves. It's better to generate some revenue by offering discounts rather than letting them go to waste.
Rewarding Loyal Customers
Building strong relationships with loyal customers is crucial for business success. Offering discounts as a token of appreciation can deepen customer loyalty and foster long-term partnerships. This strategy can encourage repeat business and lead to increased future orders.
Leveraging Economies of Scale
In B2B sales, when you receive discounts from your suppliers due to bulk orders or economies of scale, passing on a portion of those savings to your customers through discounts can be a win-win situation. It helps drive greater volume sales, lower unit costs, and strengthens your position in the market.
Strategic Approaches to Discounting
Discounting can be an effective tactic when implemented strategically. Here are some specific ways to use discounts to your advantage:
Seasonal Sales
Timing is crucial when offering discounts. By providing discounts on seasonal products at the beginning or end of their selling season, you can create a sense of urgency and significantly boost sales during these periods.
New Product Introductions
When launching a new product or service, introductory lower prices can generate excitement and word-of-mouth advertising. This can help spread awareness and attract new customers who are eager to try out your offering.
Targeted Discounts
Identifying specific interest groups, such as senior citizens or students, and offering tailored discounts can drive volume by incentivizing these groups to make purchases. Additionally, their referrals can further expand your customer base.
Penetrating New Markets
Lowering prices can be a powerful strategy when entering a new market. By offering competitive pricing, you can quickly acquire new customers and gain a foothold in the market, establishing your brand presence.
The Drawbacks of Discounting
While there are situations where discounting can be beneficial, it's important to be aware of the potential downsides:
Perceived Lack of Confidence
Offering discounts can unintentionally communicate to prospects that you lack confidence in your product's value. Customers may question why you are willing to sell at a reduced price, leading to doubts about the quality or efficacy of your offering.
Setting a Precedent
Once you lower your prices, customers may come to expect discounts in the future. This can create a negative cycle where customers delay purchases until discounts are available. It's essential to strike a balance and avoid devaluing your products or services.
Lowered Perceived Value
Price often influences customers' perception of value. If you rely heavily on discounts, customers may perceive your offering as lower in quality or less valuable. It's crucial to emphasize the inherent value of your product or service and avoid solely relying on price reductions to attract customers.
Erosion of Trust
Inconsistent pricing practices can erode trust with customers. If you initially present a standard pricing package but quickly offer discounts when faced with resistance, it raises questions about your honesty and integrity in future interactions. Maintaining transparency and consistency in your pricing builds trust and fosters stronger customer relationships.
Price-Focused Conversations
Discounting can shift the conversation solely to price, overshadowing the other important aspects of your product or service. When customers are fixated on price, it becomes challenging to showcase the unique value and benefits you offer. Strive to steer conversations towards the value proposition and how your solution addresses customer needs.
Profit Margin Impact
While discounting may increase sales volume, it can significantly deplete your profit margins. If you offer a substantial discount, you'll need to sell a significantly higher quantity to achieve the same revenue goals. Consider the impact on resources, including time and workforce, before implementing deep discounts.
Increased Stress on the Team
Frequent discounting puts additional pressure on your sales team to meet quotas. They may feel rushed, stressed, and compelled to move on quickly to the next sale. This can impact their ability to effectively engage with potential customers. A stressed team can also be sensed by potential customers in how marketing messages are communicated, potentially hindering sales.
Lack of Effective Discount Management
Managing discounts without an efficient system can be daunting, particularly when dealing with a wide range of products, customers, and pricing rules. Manual discounting processes often result in overlooked opportunities and pricing inconsistencies. Implementing a specialized Configure Price Quote (CPQ) system can streamline discount management and ensure optimal utilization of discounting strategies.
Conclusion
Discounting, when used strategically and sparingly, can offer short-term benefits for your business. It can help clear inventory, reward loyal customers, and leverage economies of scale. However, discounting carries risks such as diminished perceived value, erosion of trust, and reduced profit margins. By focusing on value, understanding your target audience, demonstrating confidence, proving the effectiveness of your offering, and employing an efficient discount management system, you can navigate the discounting dilemma more effectively. Remember, discounting should be approached with caution, emphasizing long-term value creation and maintaining the integrity of your brand.
Sources
Make Discounting Work for You Not Against You
The Discount Deception - Why Dropping Your Price Hurts You! by Victor Antonio, 2014
http://www.amanet.org/training/articles/should-you-offer-a-discount.aspx
http://blog.hubspot.com/insiders/should-i-discount-my-product
https://www.thebalance.com/retail-pricing-strategies-2890279
http://smallbusinessesdoitbetter.com/2013/02/5-reasons-why-you-should-offer-discounts/
http://money.usnews.com/money/the-frugal-shopper/2014/02/20/5-things-you-should-know-about-groupon
The Strategy and Tactics of Pricing, Tom Nagle and John Hogan 2016
Marketing:concepts and strategies, Lyndon Simkin and Sally Dibb 2016
Pricing with Confidence:10 ways to stop leaving money on the table, Reed K. Holden and Mark Burton 2014
Brilliant Selling:what the best salespeople know, do and say, Tom Bird and Jeremy Cassell 2012