The Pros and Cons of Regular Discounting
Our psychology columnist on the benefits and downsides of frequent discounting in your business.
We all love a good bargain. Whether we are looking for discounts on the high streets or negotiating a better rate for a service we receive, getting a discount makes us feel good.
From the view of the customer, a discount might mean they can afford to buy something they otherwise wouldn’t. Equally, it could encourage someone to make that impulse splurge they might not have otherwise made.
But from a business point of view is offering regular discounts that worthwhile? When a business and sales professionals accept a lower price consistently, this can lead to a wealth of problems. Here are some of the disadvantages to discounting constantly.
Devalues your Product or Service
A sale on a special occasion or an end of season sell off feels, to the customer, like they’re getting something worth more than they’re paying for it. But discounting on a regular basis can be bad for business. It can lead the customer to believe that this product just isn’t worth the original price, or that a business is just trying to get rid of stock that isn’t worth it.
If your products are always “on sale” then the question becomes, “well are they simply not worth your apparent asking price?”
Discounting Becomes Expected
Once the above value of products have been lowered or lessened then unfortunately for your business this creates an expectation of future discounting. Of course, this is great news for the customer as they expect a new lower price for products moving forward, and even start to negotiate further discounts from there too.
An expectation that there’s always a sale on means that you encourage customers not to buy when there isn’t one. In other words, you could kill off conversions at full price.
Regular discounting sets poor form that undermines your future opportunities to maximise profit.
As a business owner, consistently discounting can simply complicate things unnecessarily. All the records you’ll need to keep if you want to remember what prices were during a previous sale is just the start. And it begs the question as to whether your products should just be priced more competitively to start with.
But there are benefits too…
Let’s not pretend it’s all negative though. Some of the country’s biggest retailers discount with immense frequency. So with moderation, discounting and sales can be very powerful customer drivers. Here are some ways they benefit a business.
Discounting can help businesses to clear the excess stock and storage and free up any cash tied up in stock. End of season sales and discounts can be very productive in terms of clearing out excess inventory. Even if a certain line of stock didn’t make a profit, generating discounted cash with the unsold items enables a business to meet near-profit margins but also generate cash to purchase next seasons stock. At the very least, you’ll be clearing storage space in your warehouse that could be costing you money.
The art of up-selling forms when you persuade a customer to buy a more expensive item on top of a product they are already purchasing. This form of discounting can shoot up sales and profit margins without necessarily devaluing the product.
Furthermore cross-selling is a form of ongoing discounting where you can sell an associated product to the customer for a discounted price. For example, with every suit sold you can give a heavy discount on formal shoes to match. This style of discounting maintains your standards, keeps customers talking about your sales and upholds your values as a service or line or products.
So should you do it?
Well, it depends on your brand and your product of course. Many a brand (Center Parcs being the immediate one that jumps to mind) is happy to run its operations without ever discounting and simply position itself as exclusive or premium.
But for most brands, sales at key times of year offer a wealth of business opportunities. Just don’t become a brand people expect constant discounts from or it lowers the perceived value of what you sell and results in an expectation of discounts and a reluctance to ever pay full price.