Discounting – Don’t Let it Bring You Down

Discounting is popular, but very risky. It's an easy trap to fall into and a hard one to climb out of. Follow this strategy to avoid sinking your own ship.

Written Sep 28, 2010, read 2378 times since then.

Offering discounts is a popular business strategy. But is it a good idea?

In our present economy, driven by price hypersensitivity and what the Harvard Business Review calls “the new thriftiness,” marketers are discounting like never before.

Discounting is a risky endeavor. It’s an easy trap to fall into. And one that’s very hard to climb out of.

By offering discounts yourself, you may think you’re building your business. But you’re actually harming your brand value and your profitability.

So, is discounting ever a good strategy? Yes, if it’s done right. Here’s a basic guide to help you do it wisely.

When not to discount:

1. To close a deal with a new customer
Consumers and businesses alike will ask for a discount – in direct and indirect ways:

“I can get this cheaper down the street!”
“Our budget’s really tight this year.”
“Is that your best price?”
“Can you discount it so I can get this approved?”

Do not simply mark down your price to get the business! If a prospective customer wants to buy from you but has legitimate financial constraints and asks for a discount, say “Yes, I’d like to work with you on price.”

Instead of a giving a discount, offer to look at their needs and then at appropriate options.

If you sell a product, is there a less expensive version you can offer? If it doesn’t already exist, can you create alternative products at a lower price point while retaining margin? If you can, then consider doing it.

If it’s a service, can you remove specific features or benefits, reduce the scope of the work, change the terms, increase the lead time, etc. in order to lower the fee?

Customers will appreciate your willingness to work with them. They’ll also appreciate the value of the features they have to forego to get the lowered price. This dynamic often means you end up winning their business and doing so at the initial price quoted.

It’s funny how money can be “found” when a purchase is desired enough. And if the money’s simply not there, you’ve given them options they can afford. If those don’t exist, then refer them on.

2. To secure return and renewal business
These are your existing customers. They are the ones who know you best and presumably, love you most. If you have to discount to secure this business, then something is wrong. They’re either not seeing the value for the investment or they really don’t have the money.

If it’s the latter, and retaining their business is really important, then use the approach outlined above instead of discounting your price.

Remember, once you discount, you’ll have a hard, if not impossible, time bringing fees back to their normal level. However, if you sell a lower-priced option or reduce the scope of the project to meet the limited budget, customers will be more apt to return to the full-priced option when money is available.

3. To undercut your competition
Once you discount to undercut your competitors, you’ve begun a battle of diminishing returns. You discount, then they discount, then you discount more, and so on. This is how you turn yourself and your offering into a commodity. No longer is your product or service about unique benefits. It’s simply about price. And anybody can beat you on price.

With this approach, you may win business, but at what cost? You’ll have more customers, but they’ll be price sensitive (not in the best way!) for ever-shrinking margins. That’s not a desirable or sustainable way of doing business.

4. To market to high-end consumers and business accounts
If this is your market, then you know that your clientele isn’t shopping based on price. They may signal that they are, but they really aren’t. The rich-and-powerful love to negotiate. Why not? It’s a kind of game. Don’t be offended. You can play along without playing by their rules in order to win the business. If you discount, you cheapen your brand and may turn off the very customers you most want to attract. Stand by your value and your price.

5. To sell products or services that impact health, safety and/or security
When consumers and companies are buying things that affect their health and well being, are they really going to choose the cheapest solution? Think about it. If you’re looking for a doctor or dentist, what’s more important: price or patient reviews? What about securing your data: price or years of experience? Price could factor into the decision, but it won’t lead the way. So why would you lead with a discount?

6. To secure a long-term contract
Businesses sometimes offer a discount to give clients an incentive to sign long-term contracts. I used to think this was a good idea. But I’ve seen how easily contracts are broken these days. Better to maintain your margin now then trade it off for business you may lose before the end of the contract.

So, in a price-sensitive economy, how do you stay competitive if discounting is so risky?

When to discount:

1. To draw in new customers
If you’re launching a new business and need to build your customer base, consider an introductory offer. This is a discount or special offer on a first-time purchase. It’s a way to help customers overcome their initial reticence to sample your product or service. Only offer it once and for a limited time. You don’t want to establish a pattern of discounting, like many major retailers, or customers won’t want to buy anything full-priced. Just ask Macy’s about the detrimental effects of over-discounting.

2. To encourage a larger purchase
If you’re proposing multiple products and/or services and you’re not sure your customer will buy them all, you can offer a small discount to encourage a larger commitment. Retailers will offer two-for-one specials to encourage that extra sale. Just make sure that the additional margin you make with the larger purchase more than covers margin lost to the discount. Otherwise, it makes no sense.

3. To move old inventory
If you have out-of-date inventory that is more expensive to keep in stock or otherwise dispose of, then offer a discount!

4. To build your brand and integrity
There are clever ways to discount that promote your brand and business integrity. If you consider yourself a “green” business, you may offer an incentive that conveys this message. Peet’s Coffee gives a discount when you use your own cup and Apple offers a discount on a new iPod when you recycle your old one. If you must discount, find a way to use it to strengthen, not weaken, your brand.

If you respond to market conditions by slashing prices, you will cut an enormous hole into your own business. Follow these guidelines for smart discounting strategies and you won’t sink your own ship.

Learn more about the author, Amy Harcourt.

Posted by Adal Bermann, San Francisco, California | Sep 29, 2010

Great article Amy! You didn't just talk about... you covered it. Thanks.
Posted by Amy Harcourt, San Francisco, California | Sep 29, 2010

Thanks Adal! There's so much to say on this topic. So glad you found it comprehensive.
Posted by Angela Gonzalez, Grass Valley, California | Sep 29, 2010

Great reminder on how NOT to dilute your brand. I've been tempted to discount and your article covers when it's appropriate and when it's going to hurt my business in the long run. Thanks for writing such a useful article.
Posted by Angela Gonzalez, Grass Valley, California | Sep 29, 2010

Great reminder on how NOT to dilute your brand. I've been tempted to discount and your article covers when it's appropriate and when it's going to hurt my business in the long run. Thanks for writing such a useful article.
Posted by Rich Stagliano, San Francisco, California | Sep 29, 2010

Excellent article Amy! I used to discount my services in a bit of a half hazard way when I first opened my practice and did not find it very effective. I really like how you laid out the guidelines for when and when not to offer discounts. Very helpful!
Posted by Amy Harcourt, San Francisco, California | Sep 30, 2010

Angela, thanks for your comments. It looks like you and Rick deliver real, meaningful and lasting value to your clients. I'm glad to hear you're not discounting it.

Rich, I really appreciate your note and can't wait to meet this Friday to talk more about your marketing strategy, including pricing.
Posted by Karen Mathieson, Portland, Oregon | Sep 30, 2010

Thank you, Amy, for outlining so clearly the reasons to be very careful when entering the discount zone!

Early in a dual-services former life as a freelance writer and gigging musician, I often heard from people who suggested that I write or play the harp virtually gratis, on the basis of "the great free exposure." That and the use of discounts for my services was a generally bad idea, as I came to learn--and for all the reasons you mention.

On the other hand, as you point out, there are times when offering a discount is appropriate for bringing in new customers, building a brand, and living with integrity. Yesterday (before I read your article) I posted a promotion with a discount for basic Biznik members which becomes quite sizable for Pro and ProVP folk.

My thinking was that I'd rather earn somewhat less in order to work with people who share some of my entrepreneurial values, while encouraging support for the infrastructure of a great social media site. (I trust this comment avoids breaking the 95/5 rule!)

Cheers, Karen
Posted by Elizabeth Tackett, Bellevue, Washington | Sep 30, 2010

Excellent article! Thank you so much for writing and posting about this topic. I'm going to share your article on my Eastside Women In Business FB Page for everyone to benefit from your advice and insight!

Nicely done!

Elizabeth
Posted by Judy Dunn, Seattle, Washington | Sep 30, 2010

Good, solid advice here, Amy. At first glance, your #1 on when not to discount and your #1 on when todiscount seemed contradictory. But the distinction you have made is so important. There is a big difference between creating a special, first-time buyer offer and being talked down on your normal prices. One was done with a purpose and leaves you in control and the other lease you at the mercy of hagglers and proves you can be talked down. And, yes, I've learned over the years that discounting can be a slippery slope. Once it starts, it just kind of snowballs.

Start-ups and biz owners in their early years would be wise to bookmark this article. Nice job.
Posted by John Davies, Bothell, Washington | Sep 30, 2010

Thanks for the input. I especially like the idea that if you have to discount do something to strenghten your business brand. - For our business - Junk Removal, we could offer a discount if the customer has a legitimate referral.
Posted by Amy Harcourt, San Francisco, California | Sep 30, 2010

Karen, you're absolutely right! There will be times when a discount makes sense for your business. Your Biznik promotion is a good example. Especially if you limit it in some way, like to an initial engagement.

I believe there are times when giving free services or products makes perfect sense. Sampling a new product is a way to hook new buyers. Free advice is a way to show potential clients your creativity and problem-solving skills.

For more on that, see my blog post: http://www.definitivemarketing.com/blog/

Elizabeth, thank you SO much for spreading the word. I'll check out your FB page!
Posted by Karen Mathieson, Portland, Oregon | Sep 30, 2010

Having conversations like this with enterprising and thoughtful peers is such a treat. Thank you for being there, Biznik Buddies!

Amy, you're spot-on concerning the need to consider parameters when establishing a discount. When I was working with adult music students in my private studio, I never gave a discount precisely because of the "creeping expectation" factor.

Even then, I tended to raise my lesson rates more slowly than others, so that I was providing a de facto discount by the end of a couple of years. One Microsoft exec who studied with me insisted on paying twice my going rate. "I want you to learn to value what you're offering," she'd say,and I'm still working on how to internalize that.

So, I did consider carefully whether to put an expiration date or other limitation on my offer to the Biznik community. Although what I'm providing as a communications coach bears a strong resemblance to the supportive, responsive learning environment I gave my adult avocational harp students, there's a significant difference: Because I was conveying a complex classical music tradition through the HarpWings studio, I generally required a commitment to at least two years of study before I'd accept someone to work with me. (People often stopped lessons sooner, for various reasons, but this was a good way to separate the truly serious from the casual pluckers.)

These days, while I do provide communications coaching on an hourly, open-ended basis, the fact is that the sessions are far fewer than needed to learn an instrument. I'm a firm believer in the "teach a person to fish" school, and that's much easier with matters such as grammar and voice tonality than it is with one-handed arpeggios.

Amy, your excellent article conveys that context is vital in the creation of discounts. The important thing from my perspective is to think strategically about what we're doing, so that we don't find ourselves feeling resentful, scanting the client, or--heaven forfend--losing money on the proposition!

Cheers, Karen
Posted by Taylor Ellwood, Portland, Oregon | Oct 01, 2010

Good article. I've made some of the discounting mistakes you mention above and it took me a little while to recover. I'd probably add another tip which is: Be firm on your pricing at all times and why you price the way you do.
Posted by Scott O'Neall, Marysville, Washington | Oct 01, 2010

Exellent coverage of a critical issue Amy. Thank you! I've found that we can group prospects into two broad categories- those that purchase based on value and those that purchase based on price. Most often those that choose lowest price are the ones that require the most customer service resources to retain.

You offer some terrific strategies to employ, demonstrating that we are sensitive to the economic realities that our present and future clients are facing and at the same time preserving our margin.

If we allow our margin to diminish, we soon will not be able to service our clients in the manner that we want and they deserve. And that benefits no one.

Thanks for a great article!
Posted by Amy Harcourt, San Francisco, California | Oct 01, 2010

Thank you for all the wonderful comments! They add so much to our understanding of this topic.

If you determine your price based on the value you deliver versus the time it takes to deliver it (this applies to service-based businesses), it's easy to demonstrate to your clients why you've priced your services as you have.

And in doing so, you can easily adjust the price downward to meet a client's tight budget, by simply removing bits of value.

If you want more on that topic, check out this article:

http://biznik.com/articles/how-to-increase-revenues-with-value-driven-pricing
Posted by Dennis Dilday, Everett, Washington | Oct 09, 2010

Great article Amy. Thanks for reminding us to re-read Value Driven Pricing. I should probably read it daily:-)

Activator Methods Chiropractic Technic in Everett, WA
Posted by Gil Zeimer, San Rafael, California | Oct 12, 2010

Amy, Terrific article! In the past, I've often been so eager to sign up a client that I have readily discounted without thinking of the ramifications. Your advice will go a long way in me being able to shift the pricing paradigm. Thanks, Gil
Posted by Amy Harcourt, San Francisco, California | Oct 13, 2010

So glad to hear this is helpful. Especially for seasoned pro's like you guys.

Dennis, I actually revisit the value-driven pricing stuff (mine and others) often. It helps keep me on track.

Gil, it's so tempting to sweeten the deal to secure a new client. But in hindsight, they can be the most demanding.
Posted by Patricia Eslava Vessey, PCC..., Seattle, Washington | Nov 16, 2010

Great article Amy. Thank you. Setting fees and discounting can be challenging. Love the clarity and guidelines you provide.
Posted by Brian Crouch, Seattle, Washington | Jan 24, 2011

Great to see the two sided approach here, Amy!

I recall a salesperson who said, "Of course we can offer a discount... Exactly what part of my services, which I normally offer, would you like me to exclude?" :)
Posted by Amy Harcourt, San Francisco, California | Jan 24, 2011

Thanks Brian! l like how succinct this is and think I'll start asking "What part of what we've discussed would you like to leave out to bring the price down?" It's straightforward and has their best interests at heart.
Posted by Paul Brogan, Encino, California | Feb 28, 2011

Amy, I really liked your article and I will share it with my students. I teach trainee psychotherapists who often feel very uncomfortable asking people to pay for the valuable service they provide. Many rush into discounting before they are even asked to by a client.

Discounting can another example low self-esteem raising its head in business. I like to tell my students to "do good and do well."
Posted by Amy Harcourt, San Francisco, California | Mar 02, 2011

Paul, thanks so much for your comment.

Psychotherapists provide such a valuable service, often far greater than their hourly fee. I'm thrilled that you're sharing this article with your trainees.

Given the standard of hourly pricing, here's another article you might find useful:

http://biznik.com/articles/hourly-rates-you-could-be-making-so-much-more

It would be amazing to see therapists shift to value-based pricing and away from hourly.

Thanks again for reading and commenting. I really appreciate it.