7 Dangers of Discounting

Posted on: 8th July 2014

You’ll know how difficult it can be out there to maintain your effective pricing strategy. How often have you been drawn into a price battle with your customer, with the biggest threat going through your mind that you’ll lose the sale if you don’t discount?

There is no doubt that discounting your price could provide you with a quick sale and occasionally improve overall sales.  Discounting might help to boost sales and attract new customers in the short-term too, but from a strategic perspective it can have a negative impact on your product or service, your quality and your profitability.

Before you do offer discounted prices, ask yourself the following questions: 

1)     Are you creating a negative image for your company?

By discounting, you effectively reposition your brand message. You are sending the message that your service or product is just a commodity, rather than something of value to the customer. This might be intentional; Asda’s positioning is obviously different to that of Mercedes for example, but just consider your own offering before potentially changing your customers’ perceptions of your company.

2)     If you're the type of person who buys based only on price, are you the kind of customer you would want?

Focusing on discounting sends the message to your customers that they might as well shop around for the cheapest price anywhere, because you have nothing to offer them but a lower price.  The kind of customers that are attracted to you because your price is low is also the sort of customer who will flee to your nearest competitor the second they have a discount or special offer running, these customers are never your best customers and they certainly aren’t loyal which brings us nicely onto the next question... 

3)     Are you in danger of starting a price war you can’t win?

When your competitors see you discount, they will naturally retaliate by cutting their own prices, so what happens if they match your price? Your advantage is immediately eroded, and worse still, what if they beat your discount? Can you afford to reduce prices further? It’s a downward spiral.  The company that will inevitably win is the company with the deepest pockets and that may not be you.  Ultimately no one wins, both you and your competitors are eroding your profits.

4)     Will you be damaging your profitability? 

Routine discounting is no doubt a “quick fix” but can become damaging to your business growth in the long run.   Before you offer the discount you really need to consider why you are doing it.  Is it an investment? Will it lead to a greater financial return in the future or is it just the easiest way to close the sale.  Consider this example: If your business has a 30% gross profit margin and you offer a 15% discount you are giving away a massive 50% of your gross profit.  That obviously means you have to sell twice as much of that product or service in order just to stand still.

5)     Are you setting a precedent?

The new price you offer is the reference point from which your customer will start negotiating for their next order; after all you were able to do it last time so why not now?  It’s now going to be difficult to raise prices without the customer perceiving you to be dishonest, to be ripping him off by charging a higher price than you have already demonstrated you can achieve.

6)     Are you affecting the quality of your products & service down the line?

Due to the discounts, profit margins are naturally down so you have to start looking inside your company to cut costs if you are to sustain your profitability. You need to start looking at your cost of staffing, marketing and quality; you have to cut costs on the inside because you aren’t making the profits on the outside.  All this can happen gradually but as you become more dependent on a price-only strategy you can unwittingly focus less on what you can do for the customer and more on cutting costs. This means you have less to invest in developing your business, stifling your growth and leading to poorer quality.

7)     Are you causing stock inefficiencies and inconsistent buying?

By offering regular discounts as a pricing strategy you are opening yourself up to customers stock piling products when your prices are low and prices falling off severely when the price returns to normal.  This is a self perpetuating problem too because once you notice the marked pattern of high sales during a discount period and a fall in sales when your discount is removed you start believing that you need to apply the discount in order to make the sales.  It may be that you are not losing any sales, you may in fact have unit sales growth, but it’s worth working out how the change in sales pattern is affecting your bottom line.   

Instead of discounting, learn to create value for your customers so they do not feel like they have to ask for discounts. After all, your willingness to give a discount may send a message that you do not think the value is there.  To attract and gain new customers, whilst protecting your pricing strategy and positioning in the long run, you need to think how to add value.   

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