Discounting is an accepted part of contemporary and historical product pricing strategy. Justifications are often persuasive: Black Friday and Cyber Monday demonstrate that, if nothing else, customers are enthusiastic – occasionally to the extreme – about buying cut-price products.
Nonetheless, if you’re resorting to discounting, it’s quite likely that you’re ignoring some important flaws in your business model and product pricing strategy. Reducing your prices is akin to painting the walls of your house while the foundations are weakening: it’ll make a superficial difference, but in the long-term, it can cause more harm than good.
Why discounting happens (and why it shouldn’t)
In many respects, discounting is a popular tactic because it’s easily understood. When goods cost less money, they’re available to consumers who might otherwise be priced out. If your product is hard to differentiate from the competition’s, lowering the cost helps you stand out. What’s not to like?
For the consumer, nothing. For the company, plenty.
Discounting boosts short-term revenue, but damages your prospects in the long term. Firstly, lowering the price because you can’t differentiate your product simply ignores the issue that you can’t differentiate your product. Instead of looking for other ways to provide value, you find yourself embroiled in an escalating war of discounting – one that bigger companies, better able to bear the impact on their margins, will invariably win.
Worse, stooping to budget pricing means that you risk being seen as a budget brand. This creates an impression of your company in your prospects and customers’ minds that you cannot offer the level of quality available at the top end of the market. This naturally means they aren’t quite as inclined to form long-term relationships with you – and given that, according to McKinsey, loyal end-users spend 67% more than disloyal ones, this is a serious problem.
Finally, it simply isn’t guaranteed to work. Research from Inc. indicates that any short-term boost in revenue can still lead to a downturn in overall earnings: a 1% discount can diminish profits by 8%.
Rethinking your product pricing strategy
Instead of discounting your product, think about what your customers actually need – and how you can do more to provide it. If you sell computer mice, will they be more inclined to buy if you also start offering keyboards? If you sell mops, could you also sell brooms and cleaning solution? What resonates with their requirements, and what doesn’t?
Customers like being able to consolidate their purchases: it saves time and energy. They also appreciate the effort that goes into addressing their requirements: if they feel like you’ve nurtured the relationship, they’re more likely to speak positively of your brand – to friends, to business partners, and even in written testimonials.
Diminishing your prices can ultimately diminish your brand. Don’t fall into the trap of discounting: it harms your business in the long-term, and any short-term gains are inevitably limited. Your company will always lose the battle of prices eventually – so make sure you win the war of value.
To establish an effective product pricing strategy, you need to develop a better understanding of your customers and their buying habits. Find out how our sales performance software can help, or contact us for more information.