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The Downside of Discount Pricing

Here's a look at why a discount pricing strategy may be less than desirable for your small business.


Simon Crompton, freelance Journalist and entrepreneur
Photo: Simon Crompton, freelance journalist and entrepreneur; Source: Courtesy Photo

Discounts for distribution channel members and even end user customers can be a great marketing tool.

Pricing discounts draw customers that normally would not shop with you and spread brand awareness. By expanding your customer base, you create a more recognized name for yourself. However, there are a number of downsides to having your name attached to a product that you are willing to sell for less.

Give careful thought to your brand position and overall marketing strategy when offering discounts to customers. Although it is a great perk for customers who are already loyal, it means something completely different to customers who find you because of a discounted product or service.

Here’s a look at why a discount pricing strategy may be less than desirable for your small business:

 

  1. Discount prices become the norm.

    Customer loyalty cannot be bought with discounts. Customers that are attracted to your brand because of a discount will not be loyal to you without one. Many consumers see a sale price as the price they should normally pay for something. “Discounts used too often begin a downward pricing spiral that may eventually damage your ability to sell the product at full price.” (Houston Chronicle) By establishing a discount pricing strategy as the norm, you run the risk of weakening the integrity of your pricing.

    Take the auto industry for example and Auto World Las Vegas car dealers. “Auto manufacturers and dealers are reinventing their approach to selling cars by simplifying pricing and employing strategies to make the experience friendlier. Some dealers moved to the one-price model. Others tried promotions that give buyers the same deal as the company’s employees. Some promise a price guarantee: If buyers find a better deal, say within 60 days, the dealer will refund the difference.” (Trib Live: Business) But in the eyes of discount-driven consumers the dealer has basically said that the sale price is the actual value of the car.

  2. Discounted products lose perceived value.

    By discounting products, the value goes down to the discounted value. It is hard to take prices back up once they are promoted at a lower level. In many cases, this will lead to customers either waiting for the next promotion or asking for a discount on a regular basis.

    With a discount pricing strategy your product is no longer seen as valuable as it once was and no matter the quality of the product, you have linked the value to the discounted price. Perceived value is an important aspect of business. If your customers don’t see the value of a product at its normal price, then it has dropped in value, permanently.

  3. Customer loyalty is not based on sales price alone.

    Building a loyal customer base is one of the most difficult, but important, aspects of your business. Creating a trusted brand is a major goal for any business. Customer loyalty is based on the quality of the experience they receive from a brand. A loyal customer will see the value in spending a little more to get a quality product. You cannot increase customer loyalty by undervaluing your brand.

  4. Loyal customers may feel slighted.

    When you use a short-term discounted price offered to stimulate sales and acquire new customers, your loyal customers may feel their value has been diminished, as well. Customer loyalty works both ways.

    When customers give you their loyalty, they expect loyalty in return. If a discount is applied to certain customers and your current loyal customers discover it, they will have every right to feel slighted. You are not rewarding their loyalty, but treating them worse (in their minds) than new customers.

  5. Decreased profit margin.

    When you create a pricing strategy for your goods or services, you will attempt to find the sweet spot between profit and affordability. Having the greatest product in the world doesn’t do you any good if no one can afford it, and the reverse is also true. When setting prices, you looked at the profit you would make per sale and made it as attractive to the customer as you could.

    Discounting prices will undermine the profit you make on your product. Decreasing the profit margin will make it harder to develop new products or improve existing ones. It will also make it harder to cover overhead and related costs that have to come out of your profit. Having a profit margin drop by fifty percent means that you will have to work twice as hard to make the same amount of money.

Although discounting can give you an advantage in short-term cash flow, there are many reasons to avoid it or find an alternate method to reward customer loyalty. Bulk incentives, loyalty reward programs or even a unified discount program that offer all customers a discount once their order reaches a certain amount can have much more positive impact.

Do you run a service based business? Here’s a look at profitable tips to consider when pricing services.

Need more help with your pricing strategy? These 5 pricing techniques will maximize revenue and profit.

 

This article has been edited and condensed.

Simon Crompton is a freelance journalist and entrepreneur, who spends the majority of his time blogging about business startups and consulting on web development. He has launched multiple online companies. He is also a dedicated follower of fashion, and has written for the Financial Times and GQ. Connect with @PermanentStle on Twitter.

 

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