Dispelling Disconnects in Discounting Behavior ??

Patrick McCullough , VP at a premier pricing consultancy, posed a very interesting question in a recent post:

"I've had numerous client conversations in the last two weeks about the effects of discounting behavior in challenging economic times. Discounts are nothing more than a statement of the real market price for your product.

So is your discounted price representative of your real market price?

Seller's answer: "No"... yet they do it year after year to meet their (short term) quotas

Executive's answer: "Of course not"... yet they do it year after year to meet (short term) Wall Street expectations

Why the disconnect?"

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Why indeed!

My thoughts? ??

EXSUM: The disconnect between the belief that discounts do not represent the real market price and the practice of offering discounts can be attributed to factors such as short-term focus, competitive pressures, perceived value, inventory management, price discrimination, and fear of losing customers. Despite the potential short-term benefits, businesses must be cautious about the long-term consequences of relying on discounts, which can include erosion of brand value, price wars, lower profit margins, altered customer expectations, and reduced price sensitivity.

1. Short-term focus: Both sellers and executives often prioritize short-term goals, such as meeting quotas or appeasing Wall Street, over long-term value creation. Discounts can help achieve these short-term objectives, even if they may not be in the best long-term interests of the company.
2. Competitive pressures: In challenging economic times, businesses may feel compelled to offer discounts to remain competitive and maintain market share. They may be responding to pricing pressures from competitors or attempting to attract price-sensitive customers.
3. Perceived value: Discounts can create a perception of value for the customer, driving sales and generating interest in the product. This strategy can be particularly effective when customers are more focused on getting a good deal than on the product's true value.
4. Inventory management: Discounts can be a tool to manage inventory levels, especially for products with a limited shelf life or products that are being replaced by newer models. By discounting these products, companies can clear out inventory and make room for new merchandise.
5. Price discrimination: Companies may offer discounts to different customer segments based on their willingness to pay. By doing so, they can maximize revenue and profit by capturing consumer surplus. This practice, however, may not reflect the true market value of the product.
6. Fear of losing customers: In challenging economic times, companies might fear losing customers to competitors. As a result, they may offer discounts to keep customers loyal and to maintain their relationships with them.

The disconnect between recognizing that the discounted price isn't the real market price and continuing to offer discounts can be attributed to the complex interplay of these factors.

While offering discounts in certain situations may be necessary, businesses should be mindful of the potential long-term consequences of relying too heavily on discounts.

Some of these consequences can include:

1. Erosion of brand value: Continuously offering discounts can dilute the perceived value of a brand. Customers may start to associate the brand with lower-quality products or question why the products are consistently discounted.
2. Price wars: When multiple competitors engage in discounting, it can lead to price wars, which can result in decreased profit margins for all involved parties. Price wars can be particularly damaging for smaller businesses that may struggle to compete on price alone.
3. Lower profit margins: Discounts can eat into profit margins, making it difficult for companies to invest in product development, marketing, or other growth initiatives. Over time, this can impact the overall health of the business.
4. Customer expectations: Offering frequent discounts can condition customers to expect them, making it difficult for a company to sell products at their intended price. This can further perpetuate the discounting cycle, as businesses may feel compelled to continue offering discounts to maintain customer interest.
5. Reduced price sensitivity: Frequent discounting can make customers less sensitive to price fluctuations, which can make it more difficult for businesses to sell products at a higher price point when economic conditions improve.

While discounts can be an effective tool for achieving short-term objectives, businesses should carefully consider the potential long-term implications of their discounting strategies.

To maintain profitability and brand value, companies should use discounts sparingly, target specific customer segments, and focus on providing value-added services or bundled products.

By aligning discounting practices with long-term goals, businesses can strike a balance between meeting immediate needs and ensuring sustainable growth in the future.

You can read the full post and all its commentary here: https://www.dhirubhai.net/feed/update/urn:li:activity:7045080069446201344/

/// ROUNDS COMPLETE

/// HOLDEN SENDS