The Downside of Discounting and Alternatives to BOOST Your Business

Though slashing prices is an obvious way to spike your sales, not all small businesses have the bandwidth to make this a regular practice. Every customer of every business wants to pay less, some even expect free. Take those furniture commercials for instance; buy a couch and they’ll give you a coffee table, 2 end tables, area rug, 2 lamps, 2 flat screen TVs, an IPod and pizza vouchers, all for free. Some furniture stores tried to take that one step further, by offering all that and paying for your gas just to drive to the store. But if you're a small business owner, cutting prices can have a seriously negative effect on business cash flow. Business owners who lower prices in response to pressure from customers or with the expectation of tapping new markets often find that the hoped-for sales growth doesn't compensate for the loss of margin. But there are other ways to give business a boost, strategies that may be even more effective than a massive promotion, or giving away the store.

Each business is different, and the effect of a price discount varies by industry, profit margin, and other factors. However, as a rule, a discount of a given percentage requires a considerably larger percentage increase in volume in order to make up for lost profits.

For instance, if a ten percent discount is given off the $100 price for a product that costs $30 to produce, the business must sell 17% more units to show any increase in profit. The slimmer the margin, the greater the impact. When a business with 20% margins offers the same 10% discount, it gives up 50% of its gross profit.

Because of the powerful leverage discounts have on profits and cash flow, business owners clearly need to take great care when offering discounts. This may be challenging because the pressure to discount can be intense. For businesses that sell to other businesses, pressure to offer discounts usually originates in customers. Typically, a customer reports that a competitor is offering a lower price. Anxious not to lose the sale, the seller matches the reported price.

Undoubtedly, aggressive discounts are going to drive in customers to purchase promoted products.  But what happens when you discontinue the promotion?  Would the customers still consider your merchandise just as valuable as it was before the promotion?   

Here are four strategies you should try:

1. Loyalty Programs

Many businesses tailor their marketing and sales strategies toward acquiring new customers. That’s important, yes, but it’s actually your regular, repeat customers who are the backbone of your business. Studies show that repeat customers spend 67% more than first-time customers when they return, and over their lifetime they’re worth 10 times as much as their first purchase.

One simple way to get more regulars is to offer a loyalty program. Not only is this a great way to show customer appreciation, but it also makes you more money.

First, experts in loyalty program studies show that people find it easier to achieve a goal and enjoy it more when they rack up points through purchases that they like, with minimum restrictions. For instance, a student cafeteria experiment allowed students to choose a loyalty card that offered stamps for both sandwiches and sushi or just sandwiches (or just sushi). Even when students had to get more stamps (15 for the both option, and 10 for single option cards), significantly more students chose the both option and enjoyed earning rewards with it.

Second, and in relation to the first point, many successful small businesses often have a “killer product or service,” just like the famous Cronut for Dominique Ansel’s bakery in New York. Another extensive marketing study showed that offering the signature product or service as a free reward for the loyalty card produced the best results for increased purchases and profitability.  Consumers consistently seek for a unique and reliable product or service that represents the local business, and love it more when they can be rewarded for being loyal.

Lastly, the Goal Gradient hypothesis has supported the idea that people accelerate their consumption frequencies as they get closer and closer to the goal.  To prove that people indeed speed up their purchases, a group of behavioral scientists experimented with two types of loyalty cards with a coffee shop at a large university.  One group of customers received loyalty cards with 10 blank stamps for a free drink, while another group received cards with 12 blank stamps but were given 2 “free” stamps initially.  Although both had to buy 10 drinks to obtain the reward, the card with 2 “free” stamps were redeemed much more quickly- a result from the customer’s perception that they were relatively closer to the goal!  

2. Gift Cards

Gift cards are a fantastic marketing vehicle, but they’re also an enticing way to upsell your customers. If you throw in a free $15 gift card when customers meet a certain price threshold, for example, they’re more likely to grab a few more items. And if they end up gifting the gift card, that’s a new customer for you (whom you might be able to upsell as well).

3. Happy Birthday Messages

Instead of mass email-blasting a discount to your entire customer list, get more targeted by sending special offers to people on their birthdays. Even a handwritten birthday card to your most loyal customers, giving them a unique offer that's special for them.

4. Super-Fast Shipping

Ship items to your customers as quickly as possible. And optimally, quickly means that day. Research shows that 80% of shoppers want a same-day shipping option, and 61% want items within one to three hours of placing an order.

If you can swing it, dispatch couriers to deliver products around the area. In an age where people increasingly want (and expect) instant gratification, it’s a huge selling point that sets you apart from the competition.

Decisions about discounts can have far-reaching ramifications. For instance, salespeople might rely on discounts to reach sales goals. If so, sales compensation may need adjusting if discounts are reduced or eliminated. On the other hand, when discounts are given, especially when offered frequently, buyers can become accustomed to the lower price, leading to the need to reduce prices permanently.

Discounting can seem like a quick and easy way to help meet a quarterly sales goal or soothe a price-conscious customer. But the decision to reduce prices should not be taken lightly. Unless there is a clear benefit or no other way to address a problem, it may be better to hold the line on your prices.