Discounts and pricing

It is a normal tendency to want to give discounts in certain scenarios.  Businesses that are starting up or looking to break into a new market may use this technique to establish themselves.  There are a few things to look out for as this can easily be overdone.

From my personal experience, I used to sell solar PV systems back in 2010 and would go up against 4-6 other competitors for the same project.  Many of the competitors were offering break even or below break even pricing with the intention of getting traction in the industry.  This technique thoroughly devalued the sale, leaving the customer with the assumption that those charging more were essentially being greedy. 

Everyone wants to feel like they are getting value.  Customers want to feel like their needs are met and they are getting what they pay for.  Sellers of this product or service want happy customers to build word of mouth marketing systems and repeat sales.  So how do we make this happen?

First off, there are some ways definitely not to do this.  Setting up a discount for a product or service at the front end can send some unwanted messages to the customer.

 Here are some scenarios that can unfold:

• A precedent has now been set for pricing, the customer who received the discount has a different preferred amount that will be difficult to reset in the future, leading to some tough conversations if margins are not met.
• This cheerleader customer is likely to spread the word about what a great deal they got, leaving the impression that others are eligible as well.
• Future customers who are now getting wind of this, will operate with the understanding that the non-discounted rate is over and above what the business truly needs, leading to assumptions and negative beliefs about profitability.

Smart reasons a business owner may want to discount their product or services:

• Satisfying a disgruntled customer. In this age of online reviews, sometimes its truly worth it to take a small hit now instead of having to explain a negative review to a potential customer over and over again, causing long term negative financial impact.
• Liquidating over-stock. Needing to clear the shelves is a great reason to discount, just make sure this is also a learning opportunity so as not to be repeated.
• Using a loss-leader marketing strategy or loyalty program. These can be tricky so make sure to think these through.  Here are some models out there right now:
  • SAMS club and COSTCO use a version of a discounted loyalty program- their yearly fees cover the cost of marketing to you, meanwhile they make their money and margins buying in bulk from key vendors. These vendors are vetted so the consumer gets value on that front.  I get value from my SAMS club membership merely on the savings of fuel alone.
• • King soopers (KROGER/ SAFEWAY) has a discounted loyalty program based on complementary purchases. If you buy soda you are probably getting hot dogs and chips.  If you are getting eggs, you are probably getting milk and so on…they make a lot of products in house (pass shipping costs on to other vendors) and keep customers coming back and their chains are everywhere (well established market share).
• • Target has a non discounted loyalty program where the customer is targeted based on habits. For example the moment you enter your info and buy diapers, you are in the system for retargeting based on age…back to school deals start in July…from cribs to bikes and bounce houses, to finally 18 years later the college dorm room specials roll out.  The value transferred is convenience- if they market to you first and anticipate your needs, you would have no reason to shop elsewhere.
• • Here is one that doesn’t work- Kohls.  This is the bait and switch move.  The buyer that most benefits here is the super savvy retiree with lots of time on their hands, but there is not enough of these consumers to support the model.  The coupons, Kohls cash and promotions are complex and confusing.  Nike and Reebok are not on sale but since the busy soccer mom waited an hour in line, she might as well get it with the rest of the purchases.  That sale on that kitchen appliance is only on the third Thursday after Memorial day between 4 and 7…and the deals are only got through their credit cards with APR around 22%.  Kohls tactics are pushing customers away and losing market share as inflation rises and belts tighten.
• • Here is a different program that does work- College HUNKS. They have a loyalty program for repeat customers because they are smart enough to know the value and cost of attaining a customer.  The ‘thank you’ keeps the leads coming which saves time and money from marketing to new customers while they provide top notch service and gain trust through word of mouth along with market share.  It’s a WINFINITY.

Not sure which one is right for your business? Don’t worry.  Start small and test things before going all in.  Talk to other similar types of businesses and find out what works best for them.  The best design is one that works best for you.

Some basic successful strategies regarding discounts and pricing are:

• Specifying a clear time for this discount to end. This provides the customer with a sense of immediacy and a boundary for the offer.
• Providing a discount for a key demographic that is relevant and from the heart such as first responders, seniors or military. 
• Offering something completely free instead of discounted. Offering a free services or products is a fantastic way to get an edge on the market with no long term repercussions.

Overall, the best thing to do is set pricing and stick to it.  If you choose to discount the product or service, be careful and think it through.  It can get tricky to have different levels of pricing for different customers and the last thing we want is a confused customer.  Consider offering something completely free so that the product or service is not devalued.