Discounting products or services is such a deeply ingrained strategy for product marketing, that many marketers never even consider how and when to discount and end up doing it incorrectly. If you want to use discounts to boost business and build, you’ll need to consider pricing, demand, and expectations to factor your real profits. If you start with the position of never discounting your product, you’ll find a totally different approach to this tactic.
Why do we discount?
Discounts change the value equation in the minds of customers. When you price an item, you should do due diligence on what the market will pay for an item (i.e. the value it has to a customer), along with your markups and costs. You should arrive at a price that fits both the market needs and your needs for profit. This is a perfect capitalistic approach to free markets.
So when you discount, you are looking to take a balanced and established value known to the customer, and tilt the scale for the customer at the expense of the company. Now, this expense should truly never be an expense of missed revenue so if your discounting cuts into your margins at all, you are improperly positioning your pricing. What is at play here is a perception on value. The change in value perception is really more powerful than any actual change to the price.
When you can discount
There are a few scenarios in which it makes sense to discount. First, overstock or liquidation when demand has plummeted to low levels. In this case, move stock as fast as you can. This has actually become a sales tactic in itself for many low margin retail operations like cheap furniture. Second, when you discount and still achieve higher than industry benchmarks on margin. Between your discounted sales and regular sales you are still averaging above the benchmark on profits. This means you factored in discounting as a lead strategy from the beginning and are not selling the farm to drive business. And lastly, when it is an appropriate cost to you. This could be a charitable giving opportunity, or employee discount. When you can factor in a “loss” as an expense towards you operational or organizational goals, it should be allowed.
The final word
Don’t reach for a discount when times are tough. Too many products and services discount themselves to lower margins and increased business that can not operate. Looking at the many businesses who hyper-discounted themselves to death through sites like Groupon.com, we see they should have had a better plan involved with the discounting than just to drive business as a loss. They did not understand how to position themselves for discounting and suffered. If you need to discount to sell you product, before you continue you need to re-examine your position, market, and value because there is something misaligned that has deadly outcomes on the horizon.