The Discount Dilemma

As the competition and search for customers deepens, along with economic bad news, it becomes tempting to use price to entice customers into a buying mood.

Especially when discount brands seem to be the ones enjoying growth.

WalMart, with their every day low prices, saw a 9% sales growth in 2008 . Generic and private label brands now have nearly a fourth of the market while consumer brand sales slump, despite millions in advertising.

If you think that price-cutting is the answer to slumping sales, and you’re tempted to slash and cut your way into revenue growth, there are a few questions you need to consider before you take action. These include:

Will you erode the value of your brand? Every business, from a small retail store to a self-employed consultant to a Fortune 500 company, is a brand. Unless you built your reputation on discounting and low prices, you need to be careful how you approach using price as a motivator now. This is easier for retail, where sales and inventory clearouts are accepted ways of doing business, even for high-end merchandise. Most other industries, however, do not have this acceptance.

Your quality, reputation and dependability are key attributes of your brand. If you weaken or lessen perceptions about these by discounting, you may find it difficult or impossible to get customers to buy at non-discount prices in the future when they are spending more freely.

Other risks of discounting are the perception that you have been over-charging in the past, and that you are willing to discount because you don’t believe in the quality of what you sell.

How much more do you need to sell at a reduced price to match your regular price revenues? If you decide to discount, be sure you have run the predictive models that tell you what to expect in profit and impact. Unless you are sure the reduced or discounted price will give you a boost in the number of sales, you may find you are actually less profitable.

If you sell services, where your income depends on a rate for services sold, you will automatically reduce profit margins with lower prices. It is imperative to know the financial impact to your bottom line, and how long you can be sustained with reduced margins before you are in jeopardy.

If you sell goods, either as a wholesaler or a retailer, it is always positive to see merchandise moving out the door instead of sitting on shelves and racks. In manufacturing you will have the opportunity to fill future orders on a “demand only” basis, allowing you to shorten the timeline from materials purchasing to finished product shipment, which helps to free your cash flow.

If you are a retailer, this gives you the opportunity to change your product mix to items that are more in demand by your customers, giving them new reasons to come to your store.

Can you offer added value instead of discounts? Added value items are frequently more persuasive than discounting. When you consider an added value strategy think about partnering with another business with whom you can provide reciprocal added value.

You provide something to them that they can give to their customers; they provide something you can give to yours. It is a way to reward your own customers while getting access to a new group of potential customers and vice versa. Barter the added value items and you have created opportunities for both businesses to motivate and reward customers at no cost.

In controlled tests I have repeatedly found that an added value gift has a higher perceived desirability than a lower sale price.

Do you have a mix of merchandise or services priced at different levels? If yes, you can place your emphasis on sales of lower priced merchandise or services without discounting your higher priced items and still gain market advantages through low price points.

Consider this your loss-leader strategy. If the lower price can get the customer through the proverbial door, at least you get an opportunity to showcase your more valuable goods and services.

Is there a secondary benefit being delivered by your goods or services? If there is, and you can promote this added benefit, you have essentially delivered a “two-fer” to the customer – two reasons for one purchase.

A customer may not make a purchase for a single reason, but the second reason can push him or her into the buying decision. While you’re at it, throw in a few of the features to reinforce the reason for the purchase. All of this helps your customer justify a purchase decision and can replace discounting as the motivation.

If you are considering the discount dilemma, consider all the reasons it will help vs. the reasons it could hurt. This, after all, is the dilemma. I am not opposed to discounting. Discounting can often be the best way to stimulate sales. I am opposed to discounting as a solution, however, without carefully looking at all the alternatives.

If you decide that discounting offers the solution you need to keep revenue coming in while the economy recovers, my advice is to present your discounting to the consumer in a fresh, creative way that doesn’t generate a continuing lower-price expectation for your customer.

My favorite example of a price-cut ad, run during a recession, is the Sherwin Williams paint ad created by the legendary Bill Bernbach’s team at Doyle Dane Bernbach during the recession of the 1980s, when the prime lending rate was over 20% and inflation put many purchases out of consumers’ reach.

The ad was a picture of a blank white wall with one electrical outlet, also in plain white. The picture took up more than 3/4 of the page. There was no headline. But underneath the ad was this very persuasive copy: “Just a reminder. We have 550 wallpaper patterns on sale now.” In the small print it said “20%-30% off at all Sherwin Williams stores.”

That’s discounting without looking like a discount.

[For any of you who don’t know, Bill Bernbach is considered the most influential and talented practitioner of advertising, ever!]

© Copyright 2010, Excelsior Marketing, Inc. All Rights Reserved.