March 24, 2016

4 Tips for a Foolproof Discount Pricing Strategy

4 Foolproof Discount Pricing Strategies

Base image by Allison McDonald (Creative Commons)

How would you answer if you received an email asking, “What’s the biggest discount you can give me?” 10%? 15? 20? Depending on your margins, all of those might be an option, but the best answer is often 0.
 
That’s right: 0%.
 
Discounting should be a last resort, not a go-to strategy. Instead, add value with bonuses that don’t have an associated hard cost, focus on quality rather than price and find ways to differentiate yourself from similarly priced competitors.
 
Here are four tips for a smart discount pricing strategy — no matter what you sell.

1. Use restraint.

Offer discounts sparingly — not just because they affect your bottom line, but also because overusing them can impact the perceived value of your brand over time. A 2009 study from Indiana University (IU) Kelley School of Business found that providing discounts on some types of products causes consumers to permanently expect to pay less for those items.

Brands such as Kohl’s department store, for example, offer discounts with such regularity that most customers wouldn’t even consider paying full price there. Its business model is that everything is always on sale — sometimes a bigger sale than normal, but always a sale. A model like that dilutes the real price, confuses the market and tells savvy buyers that they should ask for a greater discount because you don’t hold firm on anything.

Shanker Krishnan, coauthor of the IU study, says, “It’s particularly important that shoppers don’t come to associate luxury items with lower prices” because brand loyalty can suffer when the discounts are removed. Imagine if Lamborghini held a quarterly sale where the company dropped the price of its cars to $25,000. You wouldn’t be quite as star-struck by your neighbor’s new wheels, would you?

2. Build your brand. 

Think back to when you set your prices. You didn’t pull them out of thin air, right? You studied your costs, customers and competitors. You researched the market and considered your revenue target. Only then did you set what you considered to be a fair price. That’s why, when someone asks you to price match a competitor or requests a discount, your first instinct should not be to drop your price but to demonstrate to customers why your brand is worth full price.

Let’s use Apple as an example. Apple doesn’t discount new products. Over the years, the company has leveraged emotions to create a brand that is seen as aspirational, innovative and perhaps most importantly, consistent. Everything from its packaging to its stores to its online presence has a uniform and recognizable look.

Line of people waiting to get into an Apple store.People line up around the block in Amsterdam — and around the world — to
get their hands on the latest Apple products. Photo: Floris Looijesteijn (Creative Commons)

Thanks to the strength of its brand, Apple doesn’t have to use discounts. Evangelists line up around the block each time a new product is created and consumers never consider postponing a purchase until the next big sale or asking for a discount. Apple knows and believes in the worth of its products enough to charge full price, and you should too.

3. Show off your differentiators. 

No matter what you’re selling, price should not be the only factor separating you from your competitor. Find the things that make your company special and create marketing campaigns that focus on those differentiators. Use blogging, social media, relevant keywords, great content, targeted opt-in email newsletters and other inbound marketing techniques to help position your brand as an authority on those differentiators.

An example: Whole Foods Market has prices that are consistently and significantly higher than competitors such as Kroger. During the recession, Whole Foods could have chosen to drop its prices to be competitive, but instead, it focused on its differentiators: high-quality organic products, environmental sustainability/animal welfare, healthy eating and community service. It created useful articles and blog posts featuring healthy recipes, gardening tips, organic “beauty hacks, and more. Its podcast, YouTube channel, frequent in-store events and signage all put the focus on these differentiators rather than on price.

Instead of seeing grocery shopping as an apples-to-apples (no pun intended) decision based solely on price, consumers began to think of the overall shopping experience and many of those consumers determined that shopping at Whole Foods was worth the extra spend. Your brand can follow suit by putting the attention on your differentiators rather than your price.

Examples of Whole Foods Market signage.Whole Foods Market consistently and clearly promotes its differentiators through in-store signage and events.
Photos (left to right) by Joanne WanDale Chumbley and Paul Swansen (Creative Commons)

Pro tip: Know your customers well enough to know which differentiators will matter to them and which ones won’t. If I’m selling magazine ads, for example, I start by asking questions to find out who the client is targeting and what their goals are. I could talk all day about how a particular magazine can reach high-income males of a certain age, but if the client is trying to reach women, that’s not a draw. That goes for any kind of differentiator for sales. If Whole Foods had maintained its higher prices and had customers who didn’t care about environmentalism, their approach would’ve fallen flat.

4. Add value instead of dropping prices. 

Once you understand your customers’ goals, you can avoid discounts by offering them additional value without increasing your cost. Things such as digital products and downloadable white papers have very little hard cost associated with them but can add a lot of value for your customers.

Let’s go back to the original “What’s the biggest discount you can give me?” question. I said the best answer is often 0%, but that doesn’t mean I am unwilling to negotiate or open up a conversation — quite the opposite. In this real-life example from someone looking to purchase magazine advertising, I responded by offering to add an email blast (valued at $1,500) and logo placement on a website (valued at $1,200).

That win/win approach increased the value of what the potential customer was considering (from around $5,400 to $8,100) with minimal cost on my end. That tactic doesn’t always work, but it does open the door for more discussions and negotiations. Ultimately, that will really help increase your close rate because now you’re having a real discussion about their goals and how best to achieve them.

Pro tip: For these types of negotiations, make sure the additional value that you’re offering to add is in proportion to the value of their potential buy. You wouldn’t offer a audiobook worth $25 as incentive for someone to purchase a 99 cent mp3 download.

You’ll need to adjust how you add value, depending on your industry, products and customer goals. Get creative. Adding value doesn’t always mean providing a product. It could mean providing stellar service, free shipping, personalization services, exclusive or early access to products, a delightful experience or expert advice.

Popular shoe company, Zappo’s, for example, unequivocally states that it does not offer discounts, instead saying: “As always, recall the Zappos.com experience. Free shipping both ways, fast shipping, a compelling selection, everything you are able to place in your cart is available for immediate sale, many user reviews from which to draw on, and of course our privacy policy. Each of these ensures a level of service that we feel supersedes the value of a coupon. … Although you won't find Zappos.com coupon codes anywhere, you will find many reasons to shop with us.” 

Zappo's coupon policy

In the end, it is less expensive to retain an existing customer than it is to earn a new one, so there are times when discounting could make sense for your business. Every situation is different and only you can determine what’s right for your brand, but following these tips will get you on the right track toward making smart discounting decisions.

What is your discounting strategy and has it worked well for you? Let us know!

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Adam Weiss

Adam is a business development and sales-and-marketing expert who has spent more than two decades in the media industry. As the manager of content and advertising portfolios for local, national and international associations, he has launched tradeshow advertising venues; overseen ad sales into countless publications; launched and published digital magazines and annual directories; and developed new sources of ongoing advertising revenue for clients.