If You Think Giving Discounts is a Great Idea, It’s Not
While discounting your prices is a common practice for small business owners, it’s usually not a great idea. It might generate fast cash in the short term, but in the long term it eats at your profit margin. And because the new customers you’ve brought in with the discount were buying on price rather than value, they won’t buy from you again without another discount. Discounting your prices is a slippery slope. There are better ways to gain new customers while protect your pricing structure and profits.
Here’s an example. Back a few years ago, I was buying paper crafting supplies online from a place called Wilde-Ideas Paper Art Supplies. As far as I can tell, it’s now out of business. It had such a reputation for constantly discounting its prices that everyone I knew who did paper crafting would actually joke about “waiting for their next sale.” No one was willing to pay full price. In online forums the company was often the butt of jokes. “Only 25% off? Wait a week, it’ll be 50%.”
I kept a log of the Wilde-Ideas emails over time. Every single email included a discount in the subject line. Here are their email subject lines from December through February one year.
- Exclusive 30% Storewide* Savings Holiday Sale – Final 24 Hours
- 25% Holiday Savings – Still Time for Delivery by Christmas
- Still Time for 25% Storewide* Savings & Delivery by Christmas
- Year End Inventory Clearance Sale 35% off
- Prices Slashed – up to 50% Storewide Savings
- Prices Slashed – up to 50% Storewide Savings
- Embellishments Blow-Out Sale – Save up to 35% Department Wide
- Winter Sale – up to 50% Savings & Free Shipping Offer
- Craft Tools Sale – Save up to 50%* + Free Shipping Offer
- Craft Adhesives Sale – Save up to 50%* + Free Shipping Offer
- Inventory Reduction Sale – up to 50% Savings + Free Shipping Offer
When you offer a discount coupon, there’s no value offered to the customer besides the money – so you immediately say “Shop me by price.” That’s not smart marketing. Frankly, discounting often makes you come across as desperate. I’m betting you have signed up for an online discount, bought a product, and promptly unsubscribed from that company’s list. The same thing will happen to you. Discounting is usually a cover-up for not doing enough marketing.
Tip: If you really want to try a discount, make it semi-annual or annual only, around an event that becomes a temporal landmark for your customers. Time it so that it hits during a natural slow time for your business. And, don’t offer your discount to current customers who are used to paying your full price. Offer it to new customers only. Then, plan an added bonus or an event to properly thank your current customers for their business.
A Bonus Works Better Than Discounting Your Prices
Rather than discounting your prices, I suggest you add value – an extra small product or service that could become a sale the next time. For example, a massage therapist could offer the use of essential oils during a massage, for which there is normally an up-charge. This increases the perceived value of the treatment, and opens the door for selling that additional service in the future to a client who has never bought that extra before.
Discounting your prices is especially deadly for service based industries. When you discount your time to deliver a service, you automatically have to increase your working hours to make up that difference. A personal trainer once hired me because he was working many hours but was not covering his costs. He didn’t understand why he was poor and not making a profit. He said, “How can I be so busy, yet not have enough money to pay my bills.? My prices aren’t super-cheap.”
I reviewed his pricing, which seemed solid and toward the higher end for trainers. But I quickly saw that his financial statements were not reflecting that pricing structure. After questioning, I found that he was giving away 1 out of every 3 training sessions. He didn’t realize, however, that his pricing structure was actually 1/3 less than what he told me.
In giving away one-third of his training sessions, he was taking himself from black ink to red – from profitable to not making it. Not only that, all his clients had come to expect that every third training session was free. When he tried to end his discounting, his clients were irritated. He lost about 35% of them and had to spend money in advertising to replace them. Those third-off discounts cost him in two ways!
The consequences of discounting your pricing
Training your customers to wait for discounts is easy to do, but it is very hard to end. The consequences are:
- You must depend on volume of sales to make up for the discount
- If you are selling your time, that quickly puts you into overwork status
- Your customers or clients get used to the discounts
- When you attempt to stop the discounts, many will go elsewhere
- You have taught your customers that you are a commodity to be price shopped, rather than an expert who is un-shoppable
You want to be un-shoppable – in other words, a combination of experience, talent, and expertise that cannot be matched by anyone else. Focus on selling your value, not on selling your price. Discounting your prices makes you a commodity.
Pricing what you offer is part science, part art. You know what your goods cost. If you sell for less than they cost, then your business will fail. That’s the science part – cost out, cost in, total it up.
The art part is harder to quantify but every bit as important. What is the perceived value of what you offer? If you perceive your service as worth $100 per hour and people are snickering behind your back, then you’ve got a perceived value problem. On the other hand, if you price your service too low, you won’t be profitable and will soon be working double the hours just to make ends meet.
Pricing well means takes these things into consideration:
- Your ego has not inflated what your product or service is worth.
- You know your costs cold and pay attention to them.
- You discern a fair price based on customer input, your experience, and demand for what you offer.
If you have to create a demand because your product or service is not familiar to buyers, you will not be able to price your product or service as highly as you might think it is worth. However, if you price wisely, educate potential customers, and build a business from that base you will one day be able to charge more. Why? Because, you have successfully and faithfully created MORE perceived value.
I realize there are strategies for “loss leaders” and getting people into the marketing funnel. But as a small business you do not have the deep pockets of a Wal-Mart or a Sam’s to offer super-low cost and freebies in order to gain customers. If you decide to do this, be cautious, wise, and infrequent. As I suggested earlier, build this into a well-publicized annual or semi-annual event.
Keep in mind that if you don’t value what you do, your customers won’t, either! Aim for a fair price, give outstandingly fantastic customer service, work consistently, and your business will grow. If you need an outsider’s help, ask for it. You can request a consultation with me by email.
Before you decide to discount, please read 6 Reasons Not To Discount Prices. Add value instead – it works better.