In the current economy, most small businesses have had to discount their prices to keep customers buying. In today’s guest post, Rafi Mohammed, Ph.D., offers his insights on how to use discounting to your advantage. Mohammed, author of The 1% Windfall: How Successful Companies Use Price to Profit and Grow (HarperBusiness), has been working on pricing issues for the last 20 years. He is the founder of Culture of Profit LLC, a Cambridge, Massachusetts-based company that consults with businesses to help develop and improve their pricing strategy.
In today’s erratic economy, the key to growing your business involves activating dormant customers by using strategic discounts. By “dormant,” I mean customers who are interested in your product or service, but have refrained from purchasing due to price.
The “art of discounting” involves offering lower prices to attract new budget-conscious customers in a manner that minimizes the possibility of current buyers (who are paying full price) taking advantage of these price breaks.
In the best-case scenario, all current customers continue to pay full price and the discounts generate pure incremental profits. However, it’s more likely that some existing patrons end up buying at the lower price. Thus, for a discount to be successful, profits from new customers must be greater than the margins lost from current buyers.
What are some ways to successfully discount?
1. Sell Through Discount Channels. Follow the lead of upscale retailers that sell products via outlet stores that target budget-conscious customers. Outlets are located at a geographical distance from the main stores, so they target different customers as well as provide hurdles for current patrons to jump over. Or consider restaurants that sell discounted meals offered only in their bar area. While not all companies can open up a new outlet, they can sell their products (and services) through distribution channels that target price sensitive customers in a manner that reduces the chances of cannibalization (current customers buying at a discount).
2. Create a Discount Brand. It’s common for companies to create a new brand to serve a price sensitive audience. If starting a new brand is too difficult, consider selling products at a discount via private labels.
3. Use Tried and True Tactics Such as Coupons, Sales, and Promotions. While these strategies are commonly used, they generally are not implemented correctly. Instead of viewing these discounts as a way to “move merchandise,” think about these techniques as avenues to activate price sensitive shoppers while keeping your current base paying full price. This involves creating hurdles (such as early morning sales on off-peak days, making customers clip and redeem coupons, etc) that allow budget-minded customers to credibly raise their hands to say, “Price is important to me.”
It’s understandably stressful if a company loses, say, 15 percent of its business. In these situations, it’s common to take a “slash prices and hope for the best” stance. I view this same situation differently. I prefer to focus on the fact that 85 percent of customers are still paying full price. The art of discounting involves maintaining current prices and implementing pricing strategies to activate dormant customers with low price options.