To the new business owner, offering discounts can seem like the top way to draw in consumers, but there are potentially more negatives from offering discounts than there are positives. Understanding the discount strategy can help with offering discounts so that they do what they are intended to do — spur stronger sales for a short time — instead of causing harm to the store’s brand. It is a tricky line to walk.
A discount pricing strategy is a strategy related to the reduction of the regular selling price of any good or service.
What Are Pricing Strategies?
If your company sells widgets that it buys for $4 each, you must sell that widget at a price that recoups the purchase cost while covering all other incidentals, such as overhead, utilities, marketing, staffing, insurance and even the hidden cost of shoplifting. Most retailing companies will sell products for double their cost since that is likely to give them 10% to 25% as profit.
The markup your company needs will come down to your costs. You may be located on a tourist destination street with higher rents. You may have been targeted for break-ins or possibly had a flood or some other outward act that has caused your insurance to skyrocket. Whatever your costs, they must be earned back on every sale.
So, why have discounts at all? It is because the public counts pennies. They will not pay more for products than what they perceive them to be worth. So, there is the sticky wicket: What is that magic price between a product’s worth, what is needed for staying in business and what consumers are willing to pay?
Price Discount Definition and Types
A discount is a reduction on the regular selling price of any good or service. The motivation is to attract consumers and boost sales. There are four types of discounts:
- Quantity: These reward customers who buy more at once, whether it is 10% off for spending a large amount at once or it is “buy three books, get one free” to turn over stock quicker. It can also convince them to prepay for future services (“buy five massages, receive a sixth free”) to bring in more cash immediately. In seasonal slowdowns, this can tide over businesses until times are better.
- Promotions: Short-term promotions drive sales overall and can cover a wide variety, from everything like an ice cream shop that gives a free scoop to customers who scream for their ice cream (#hashtag: "I screamed for Earl's ice cream!"), to an oil-change company offering a free car wash with every oil change.
- Seasonal: As seasons come and go, so do sales, like when blowing out summer stock to free up shelves for fall fashions. Hotels may offer a free extra night in slow seasons. Restaurants might offer special deals on Mondays, when they historically get few customers. These offers try to increase sales during times that have a track record for being slow or unprofitable.
- Loss Leaders: This is when it is profitable to sell a product for little profit because the discount attracts consumers. One example is a supermarket discounting roasted chicken because it brings in people who rarely buy only the chicken. Successful loss leaders are popular items people use regularly that encourage consumers to spend more on other items.
When Discounting Hurts
Brand and reputation are everything in business, so knowing how to discount wisely is important because being flippant with discounts can damage your credibility.
- Do not use a predictable pattern when discounting, or consumers will wait for sales to buy anything.
- Do not focus sales strictly on unknown brands, or customers may think that you sell lower-quality goods.
- Sales-hunting customers are not loyal; offer attentive service and good quality to win consumers.
- Being too successful at discounts can hinder your ability to raise prices in the future.
Pricing practices are so critical and complicated that there are countless books about it. One that is recommended by MIT and scores of economists as a must-read book is "The Strategy and Tactics of Pricing" by Nagle, Hogan and Zane.