How to Build a Winning Discounting Strategy
That attracts customers, increases profits and protects your brand.
There are times when discounting can be profitable… and times when it sucks the energy, money and life out of your business.
Have you ever considered offering discounts to gain more customers? After all, who doesn’t love a good deal, right?
Maybe you’ve offered discounts but the profits didn’t skyrocket the way you thought they would?
Knowing when to offer discounts and when to stay away can be the difference between profitability and bankruptcy for a business.
Want to know when you should offer customer discounts and when to stay away?
Let me show you.
Too many discounts is a losing strategy
Have you heard people say "I'll wait until it goes on sale". Or perhaps you said it yourself when deciding to buy something.
That could be the result of a bad discounting strategy.
A bad discounting strategy conditions your customers to only buy when there is a sale.
Jonathan Treiber from Forbes magazine agrees. He makes the case that bad discounting strategy was a major reason for some big name retail outlets like Payless Shoes and Barney's New York going bankrupt like was their failed discounting strategy.
But it's not only retailers that can suffer from a bad discounting strategy. Service-based companies can have similar problems. Offering too many discounts or "over-discounting", confuses customers and grinds down profits for any type of business.
Soooo what makes a good discounting strategy?
Well... a good discounting strategy identifies when to and when not to offer discounts. It also identifies how to reduce risks to your business when you offer discounting.
Now let's take a look at when you should not use discounting...
When not to offer a discount:
Is your product or service a premium offering?
If the quality of your product or service is a "major selling point" for your customers then discounting can have a negative long-term impact.
“Price is what you pay. Value is what you get”
By continuously offering discounts you risk devaluing your brand in your customers' eyes making them less likely to want to pay the same price they once did.
Discount your brand enough times and you can change the way your customers buy your product… as in they will stop buying from you except when there is a discount.
To make matters worse, discounting lowers your profits because it lowers your business' margins.
This creates a vicious cycle where you need to offer discounts to increase sales, which in-turn reduces your margins, which reduces your profits.
Without profits… you can't grow, and your business dies a slow and painful death.
If your business competes on quality, don’t compete on price
Another downside to discounting for small business owners is that it results in quality businesses having to compete on price with their lower-priced competitors.
If your business model is based on quality and you start to compete on price … you're in big trouble.
Customers for premium products are very different than those for lower-priced products. Price-based businesses target price-sensitive customers - they are different customer segment than quality or value-based customers. The financial models are also different.
Instead of offering discounts to increase sales, first do your research and make sure your product or service is priced right for your target customer.
If you think your existing product is not priced right and that it can be cheaper for your target audience then perhaps discounting can work …
If the price is right for your customer, then instead of discounting (which reduces your profits and has a negative impact in the long-term) you may consider increasing or improving your marketing efforts instead.
Ask yourself;
• Are you spending enough time and money on marketing?
• Is your marketing reaching your target customer?
• Are you measuring and evaluating your marketing results on a regular basis?
Often times a renewed focus on marketing to your target audience can help increase sales.
Instead of discounting, create a different, cheaper product or service
If after you do all your research you decide you want to target a lower-cost consumer then consider adding a different new “low cost” product or service.
Offering a new product at a lower price can help differentiate your products and allows you to target a cost-driver customer.
If you decide to go this route, be sure to highlight the differences between your products so you don’t confuse your existing and new customers.
When Discounts Can Be Profitable
In some situations, discounting can be very beneficial. Here are some situations when you could consider discounting.
Discounting during a new business launch
If you are launching a new business or new product, offering discounts maybe a good way to incentivize customers to try your product or service.
After trying your product or service at a cheaper price, you need a plan to have them return to your business and pay the higher price.
Customers will come back at a higher price if they experience the high quality of the product or service. Be sure to explain and demonstrate the value. Your product or service will have to do the selling.
Discounting as a reward for repeat or valuable customers
Another scenario where discounts maybe useful is as a reward for your customers.
This occasional discount will get your customers excited and could be a really good way to retain your customers.
Just be careful not to over do it.
Discounting too often can make your customers (that paid full price before it went on sale) feel tricked and feel angry that they overpaid.
One way to reduce the chance of this happening is to pay attention to how you announce the sale. For example, you could mention that the reason for the sale is to make space for new products offerings or perhaps because of a special occasion.
If done right, discounting can be a good tool to get new customers and to delight your existing customers.
What to do before discounting
Often the main reason business owners offer discounts is because they wan to increase sales and profits.
But, there is a better way to increase profits.
Figure out how to reduce your operational costs. Reducing your operational costs can have a significant impact on your business' profits. More so than discounting.
Let's take a look at an example.
Imagine a business that sells bicycles. Let's take a look at what the numbers look like if the business increases revenue by $3000 versus if they reduced their costs by $3000.
Impact of increasing revenue vs. reducing costs on business profitability.
You can see from the table above that it is more profitable to reduce costs by $3000 than increase revenues by the same amount.
When you increase revenues, but your variable and fixed costs stay the same, profits increase slightly. However, when you reduce variable costs your profits increase significantly - much more than increasing sales.
Of course businesses can't reduce costs for ever, so this strategy is limited. Still, from my experience, there are typically lots of areas businesses can cut costs.
Doing a forensic examination of your business costs and identifying areas to reduce costs is an excellent way to increase profits.
A Winning Discounting Strategy
What’s a discounting strategy?
A discounting strategy is basically a set of criteria that you have for your business that guides you when and how to offer discounts.
Here are 5 easy steps to developing a discounting strategy for your business:
Step #1: Understand your business financials
Knowing how much your product or service costs is incredibly important for all aspects of operating a business, especially for discounting.
Calculate exactly how much it costs you to produce and deliver your product or service, and know your profit margins.
Make sure to factor in all costs such as overhead, taxes, fees and all other expenses.
Check to see if there are existing business costs that you can reduce to increase profits.
Implement changes to reduce costs.
Step #2: Evaluate the impact of offering a discount
Here you can play around with the numbers and map out different scenarios.
This should give you a good idea of how much profit you will make (or lose) if you offer a discount.
Run the numbers with pretend sales numbers and a number of different discounts e.g., 10% off or 50% off et..
See if your business stands to make or lose money with discounting.
Step #3: Consider the Risks
To consider the risks to your business as yourself;
• Does offering a discount erode the value of your products and services for your customers?
• How will discounting hurt/help your reputation?
• What’s the impact in the short-term vs. Long term?
• How can you minimize these risks for your business?
Step #4: Re-look at your customer preferences
Consumer preferences change over time. Market conditions also change.
If your business has been around for a while, it maybe worthwhile to take another look at your target customer and consider if their preferences, including what they are willing to pay for and how much, has changed.
If your business is new then a thorough market evaluation should be part of your business plan and can help here.
Step #5: Implement your discounting strategy
If you are a new business then including your discounting strategy in your business plan is a must.
Even if you don't plan to offer any discounts, it can be useful to articulate this in your business plan so readers can understand that you have a clear understanding of your target customer.
By including your discounting strategy, investors or bankers reading your business plan will be able to understand how you plan to start and grow sales for your start-up.
If you're an existing business, then incorporate your discounting strategy in your marketing plan.
I'm a big believer in writing down strategies and processes because the act of writing it down forces you to think about details that you may not have thought of before.
For example, your strategy may say that you will only offer discounts when new products or services are developed. Perhaps you will limit the number of orders for any one customer to buy.
Or, maybe you set a minimum number that customers need to buy.
Whatever you decide to do for a discounting strategy, keep in mind that customer preferences change, the market changes and so should your discounting strategy.
So…consider the pros and cons of discounting, write out your strategy and evaluate it regularly. Do this and you’ll be sure that your discounting strategy is helping your business and not harming it.
You're the Expert on your business
Designing a discounting policy for your business is an essential part of any successful business.
If you're still unsure if discounting is right for your business, remember, you know your business better than anyone else.
You know your customers and your business. You're the best person in the world to make that decision for your business. If you're still not sure or need a second opinion a good business consultant maybe able to help.
Sooo, go ahead and design your business' discounting strategy.
Test it.
Change it, if needed.
You got this.
Here's to your Wildest Success!
-Michael
