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If your business has experienced a drop in traffic or sales, you may be considering offering discounts to your customers. Sales. Discounts. Markdowns. Perhaps even "Markdown Madness"...?
Offering items at a sale price is a very tempting tactic. In the short term, it drives traffic and sales. What you lose in margin is made up in volume. Problem solved, right?!
Bigger problem, created. What you're really doing is eroding your long-term margins and your long-term sales. (This is especially true if you run a business based on quality and value versus being a low-price provider.)
The problem with discounts is that customers don't see the price drop the same way you do.
As a business person, you clearly understand you are temporarily cutting into your own profit to give a little more to the customer and keep their business.
As customers we see it different. The moment you discount, it re-calibrates the perceived value of your products/services. Selling something for $200 today, and discounting for $150 tells us you are making more money on the $200 version... And you're still making money on the $150 version... so the $200 version was over-priced. The new perceived value, $150.
As a consumer buying something, we get this. As a marketer selling something, we tend to ignore this fact.
When you see an infomercial and they tell you you're getting a $199 value for only $49 do you really think you're getting $199 worth of something? Heck, no. In fact you know that may be a sucker for paying the 49-bucks.
Starbucks Coffee used to host their Annual Brewing Sale at the stores. Each spring they would put coffee and espresso machines on sale. "Lowest Prices of the Year!" the signage declared. As a customer you'd save between $50 to $200 on a brewing machine. So instead of being priced at $250, the brewer was on sale for $200. Instead of being $700, the automated espresso machine would be $500.
Well, guess what... customer perception became, if Starbucks could sell items for the lower price of $200 and $500 that must be their value. Customers stopped buying year-round and waited to buy ONLY when Starbucks had the sale. You'd be a sucker to buy it when they were not on sale.
While the ring of the cash register sounded good, Starbucks made no more money in the rush of machines sold at SALE prices than they did selling them at a fixed prices all year. (Furthermore... by having a once-per-year focus on the machines, the store employees didn't have brewing machine knowledge. As a result, today you can get a better explanation of coffee equipment at a general kitchen store like Williams-Sonoma than from the coffee expert. Discounted machines hurt the brand.)
So what should you do?
First, if customers are complaining about your prices, make sure you actually aren't charging too much. Compare yourself with your competition. Recession or not, if you were already dramatically out-pricing the competition without a dramatic difference in quality or service, perhaps you should consider lowering your prices. (I'm not recommending getting yourself into the low-price game, just make sure your higher prices offer higher value.)
Second, instead of giving away money, strategically provide add-on services or products. Instead of discounting the price of a hair cut at the salon, give away a bottle of that great shampoo you used that made my head tingle and hair smell so great. Instead of cutting the price of your website building services, offer a complimentary, 6-month, search engine optimization (SEO) service.
This accomplishes two things... (1) You don't erode the cost of your base product. (2) If you do it right, you offer customers things of value that they may never had tried before. You've created a strategic win-win. As a customer, I feel good for receiving something of extra value. As a business, you got your customer to try something new. The customer may start buying that shampoo on a regular basis, or continue to subscribe to your SEO services.
Recession or not, more than likely your customers can still afford to pay full-price for what you offer. In times when their being ultra-conscientious about spending, they want to make sure it is still worth their while providing value for the money. If they're considering whether you're still *worth* it or not, perhaps you weren't providing the experience you promised in the first place.
Long story short, discounting lowers the perceived value of your offerings, and in the long run erodes your brand. Once you start offering discounts, the only way to get that rush the next time, is to discount more. If this cycle continues, your margin is gone, your prices are bargain basement, and your brand has reduced value.
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Comments
Paul,
I agree with your comments but actually its even worse to cut prices than you stated. I'm carrying out a survey to determine what marketing activities work and which ones don't. http://tinyurl.com/6fnr6d
So far over two thirds of respondent say that price cuts don't actually work. There are a lot of more effective tools for getting new business that don't have all the disadvantages mentioned in your article.
Posted by: Malcolm Wicks | 08.15.08
Today's savvy customers are very cynical towards “sales.” To compound matters, the internet makes it extremely easy for customers to gather as much information (including price) on a product as possible. When a company decides to offer a “sale,” they must be certain that their price is in-fact lower than the prices offered by the countless other online retailers.
To give you a personal example, just recently I was looking to purchase 2 books. I found them on “sale” at a well known online retailers website. I then checked Amazon's website and found their price significantly lower than the previous store's. In-fact, I ended up buying the 2 books plus a third one from Amazon for a total price that was only $1 more than the price of the 2 books at the other store. Needless to say, it is unlikely that I will ever patronize that store again (I had been a loyal customer of theirs for several years). The moral of the story is that “sales” can end up hurting a company more than helping.
Posted by: Salam Kitmitto | 08.15.08
Paul, thanks for this post. I'll agree with you --to a degree. In some instances, discounting makes sense. Suppose for example a retailer needs to move seasonal merchandise, or needs to move one of a kind items. Also, with the sophisticated analytical applications that many retailers are using these days, they can predict just the right "mix" of products, and also how much to discount to get the products moving. Analytics takes much of the guesswork out of pricing.
Posted by: Paul Barsch | 08.15.08
Excellent advice, Paul. As a general rule most businesses do not charge enough money for their product/service. Particularly because they pay so much attention to the price portion of the value equation. Paying less attention to price and more attention to factors such as the customer experience allow businesses raise perceived value and thus command a higher price.
Posted by: Jay Ehret | 08.16.08
Not everyone can price at a premium -- there are some players that have to price in accordance with lower income brackets and slower economical times.
Posted by: Imagine | 08.17.08
Paul - I agree there are times when a retailer needs to clear out last season's items to make room for this season.
However, even in this example, you see a cycle where customers will often hold off on buying the clothing item until it goes on sale. If she *really* loves the dress she may by it now while she can (and it is in her size). But if she simply likes it... she may wait until the sale and hope her size is there at the lower price.
Posted by: Paul Williams | 08.18.08
Imagine - I agree with you. Cutting prices doesn't have to be only on a big ticket item.
Discounting the price of a quick oil change from $19.99 to $15.99 or the price of a movie rental from $3.99 to $2.99 has the same effect. You've now sent the message that the oil change is actually only worth 16-bucks or the movie rental, 3-bucks.
Posted by: Paul Williams | 08.18.08
Great article Paul. I think the effect of a price cut will be determined by the elasticity of the product in question. There are several economic models which can calculate the impact of price cuts on their demand. No doubt, price cuts do hurt brand image in the long run.
Some brands never require price cuts or promotion. We will never find GE offering promotions on its turbines; --- Buy 1 turbine get 1 free.
I think it all depends on the positioning of your brand and consumer's expectations.
Posted by: Abhi Vyas | 08.18.08
Excellent discussion. I think there are many good points made here. However, I also think it's hard to make blanket deductions about a lot in marketing (with few exceptions). Doesn't it always depend on what the product or service is and who the target market is?
Things like commodities will fluctuate in price depending on supply and demand, stock market activity, weather, etc. so gas prices and food products change regularly.
New technology makes older models less attractive and eventually obsolete, so sales are common when new products are introduced.
Then there are loss leaders, reduced to bring consumers into a business where regularly priced goods are often purchased.
I guess what I'm saying is that there are different circumstances for lowering prices, and not all of them will necessarily affect the brands themselves.
Posted by: Elaine Fogel | 08.18.08
My advice as a marketer is to put yourself in the shoes of the potential buyer.
Does the price cut affect the way you feel about the product and/or brand?
In our discussion here we're finding legitimate business reasons for discounting... are there are loads of legitimate reasons...
However, regardless of sales justification, does it diminish the perceived value?
If YES, then discounting shouldn't be your approach. Find an alternate way to get rid of the product than putting it on sale in your location.
Posted by: Paul Williams | 08.19.08
From my past experiences, I have found that everything will sell if it's priced right. I think most shopper's these days are savy enough to know the value and price before they make their selections.
Posted by: Mary Jo Finn | 08.31.08
I'm a kitchen designer that advertized a 2-hour Design-a-Kitchen Seminar. It included three projects workbooks, lunch and design solutions. I charged $50.00.
After no-one signed up I started second guessing whether my time, wookbooks and advice should be free to get people in the door.
After seeing these comments I don't feel $50.00 is too much to ask for. I'm selling custom cabinetry that if you can afford to buy you can afford $50.00.
Posted by: Marvin W. Towler | 09.23.08
It is possible, Marvin that you aren't charging enough.
Folks may wonder what quality they could be getting if they get all of that for only $50?!
Another challenge may simply be that people just don't want/need a "lunch and learn" to get their cabinets done.
Ask a few of your former clients... and ask future clients what they really need.
Is it that they want to cut costs by building it with you? Do they lack the imagination to see how it would look finished (and worth the investment)?
Just stuff to think about. Best to you Marvin!
Posted by: Paul (from Idea Sandbox) | 10.24.08