The Impact of Discounts and a Better Alternative

Is Discounting Bad for Business?

While some businesses are structured to operate with a discount model, most should take caution when deciding to lower the price of their products. Implementing discounts has the potential to cause a detrimental ripple-effect on a business.

Perceived Value and Customer Behavior

One of the core problems with discount pricing is the perceived value of a product. When this perceived value decreases it can have a negative impact on a business’ growth over time. When a customer gets accustomed to seeing discounts, they may decide that paying full price for a product is no longer necessary because prices have proven to fluctuate.

Especially if discounts become an ongoing trend for a business, it can alter the typical behavior of a customer. When regular discounts are in play, customers may devalue the business’ products and be trained to wait for the next big sale to make their purchase. Additionally (depending on the product), businesses may see an influx of customers who stockpile a product when it goes on sale, capitalizing on discount prices for a product they know they will use in the future. This is especially relevant when it comes to consumable products.

Industry Competition 

By offering discounts, it is possible that a business may influence the hand of its competitors to do the same. If this occurs, price wars can continue to drive down the market pricing and devalue products, hurting all parties involved. This can be problematic if a business does not have high levels of customer loyalty, significant market share within the industry, or a diverse selection of products or services. Since customers may opt to go with the lowest bidder, this can turn into a war of attrition where the business who can keep their prices the lowest over time will ultimately beat out the competition.

Do Discounts Increase Sales?

In many instances, yes - discounts will increase the quantity of sales during the promotion period. Discounts have the potential to attract customers that may otherwise not be interested in making a transaction. However, they are then entering a business ecosystem at a diluted price point and may not be the strongest candidates for repeat business outside of sale periods. This makes them an ‘unqualified prospect’ with much less future purchasing potential than a customer who entered the business’ ecosystem organically without the lure of discounted prices.

When discount promotions are active, the profit margin will be reduced on those sales. This may have an adverse effect on the long-term profitability of a business (for reasons previously mentioned). 

Should You Offer Discounts?

Each business must answer this question themselves, and must leverage their industry knowledge and awareness of their customer base before coming to a decision. Discounts should make sense within a business model as well and be executed thoughtfully (if at all). We would urge brands to not leverage discounts as a shortcut to short-term gain, but rather as a tactic within a long-term strategy.

For instance, a company that sells video game consoles may be able to significantly decrease their profit margin on a console sale (or even take a loss) with discounts because they know they will make up some of that money with future video game and accessory sales. Or consider car dealerships that offer servicing as well. Even if a car is sold at a discount, those cars will eventually need repairs and maintenance. Still, this is a risky approach that is more of the exception rather than the rule.

There may be other instances where it makes sense to offer a discount. For instance, if a brand has excess or outdated inventory that is failing to sell at full price a discount promotion could be a good method to offload the product while getting some cash flow in the process. Another viable scenario for offering discounts would be to earn goodwill (and future business) with a certain demographic such as veterans, students, teachers, or seniors. Adobe is well-known for offering their full suite of products at a highly discounted rate to students and teachers, but the subscription returns to the standard price after one year. By that time, the customer should have a pulse on how valuable the software products are for their continued use.

But for as many reasons as a brand can find to use a discount, there are as many counterpoints that would suggest avoiding discounts on a regular basis. While price cuts may give a business a temporary boost of new customers, it may also devalue a business in the same swoop. A brand should not get into a situation where a precedent has been set for regularly underpriced products and services. Beyond the customer perception of a brand (which is important) a business must assess its ability to process increases in sales and fulfillment, as well as how a discount may impact a business’ ability to reach its revenue goals.

How Do You Avoid Giving Discounts?

Business owners always have options when it comes to how they want to price and market their products and services. With the help of a platform like Talkable, it is very possible to run a successful marketing campaign without discounting or devaluing a brand’s product. This is by using referral and loyalty marketing to help carry some of the burden of boosting sales and customer engagement. Here are a few examples of ways that businesses can continue to increase sales while avoiding the discount approach.

Use Referral Marketing: 

Referral marketing can be a powerful tool to mobilize a brand’s most passionate customers to spread the word about a product and help generate sales. By equipping brand ambassadors with referral links, they are able to provide generous offers directly to their own audience that drive traffic back to a business. Whenever someone uses the link to purchase a product from the business, the referrer is credited with a sale and rewarded with a pre-determined benefit (such as an in-store credit). This is a great way to get new customers, as they will likely receive a discount or other incentive through the referral link - but in this way the discount is not directly tied to the brand perception but rather to the novel referral deal.

Loyalty Points:

The presence of a loyalty program can inspire current customers to engage with a brand more regularly, strengthen relationships with customers, and can be an incentive for new customers to make their first purchase. When a loyalty program is in place, customers can earn points for engaging with a brand. These points can be directly tied to purchases, such as for every dollar they spend they earn points. These points accrue over time (encouraging repeat purchases) and unlock rewards along the way. When that reward is in-store credit, the customer will feel accomplished for earning the discount while the business’ products will not be seen as having less value. Credit also often encourages bigger purchases because of the perceived boost of ‘free money’.

Perks:

Special perks can be rewarded for customers who excel by hitting a certain tier in either a referral or loyalty program scenario. This can come in many forms, but ideally would be custom-tailored to specific customer audience’s wants or needs, relevance to the business, convenience, and/or status. For example, perks could include early access to special events, exclusive experiences, free shipping or gift wrapping, curbside service, entry into bigger sweepstakes, or more in-store credit. Another great reward (especially for service-based businesses) is to offer rewards that upgrade a purchase to a higher tier. Think of how the brand experience could be made more special for the company’s most-involved ambassadors and reward them for their efforts.

Improve Program Discoverability:

By ensuring that a brand’s referral and loyalty programs are easy to find and understand, they will have a higher adoption and participation rate from the brand advocates - which means more customers and product sales for the business. Keep this in mind when building out landing pages on the brand website and in-store (if applicable) promotional materials. Customer service team-members should be well-versed in the value proposition for any brand programs to ensure flawless communication with anyone who is interested in getting more information.

It is also wise to take time to align with those in charge of a brand’s marketing to make promotion of program offerings a high priority. This can come to live in brand content such as social media posts, email newsletters, video content, and more. By sharing the full details of a program and any important dates, the marketing team can drive the initiatives forward to reach more people.

Conclusion

When comparing discounts and sales with alternative approaches such as referral marketing and loyalty programs, it all comes down to value. Both perceived and real value are impacted by each approach. While discounts may provide an influx of sales and customers, there is no guarantee that they will continue to be patrons of the business or that they will not devalue a brand’s products or image moving forward. Discounts have the potential to muddy the long-term financial prospects of a business if not done strategically.

Referral marketing and loyalty programs on the other hand encourage continued patronage (or referred patronage) in return for rewards that have both real and perceived value. Both types of programs also strengthen the bond a person has with the business, make the customer feel appreciated, and deliver memorable experiences that will keep them coming back for years to come. This approach delivers several positive outcomes that do not involve devaluing a brand's product or overall image.

If you are interested in changing the way you acquire and retain customers without taking on the uncertain cycle of putting products on sale, consider giving Talkable a try. We specialize in successful word-of-mouth marketing through referral and loyalty programs and can help businesses grow in a sustainable way. If you would like to hear more, feel free to book a demo with us and we will show you how Talkable can help your business find new ways to incentivize sales, achieve growth, and do so without offering steep discounts.