How discounts slowly kill your business

?

During a recent strategy workshop, as my client and I were strategizing for 2024 and the next holiday season, we had a very insightful conversation around pricing and discounts, which I hope will help some of you regarding perceived price and more particularly discounts.

?

Setting the scene, she specializes in premium kitchenware, offering beautiful products that definitely stand out from competitors. Given the outstanding craftmanship and quality of the raw materials, her COGS are quite high, which she reflects on a higher pricing that most brands.

?

However she is challenged by the low number of sales, so the question of using more frequent discounts rose, since we had some success in November and December when we proposed a small discount for the gifting season.

?

From the conversation, one sentence summarised her dilemma very well:

“On the one hand, discounting would be an opportunity to create more sales, but on the other hand I believe it would devalue my brand and the quality of my products, on top of eroding our margins. So what direction should we take?”.

Though call, isn’t it?

?

I think she’s absolutely right about the risks of discounts devaluing her brand perception, I’ve seen this plenty of time and I’ll share now why discounting can often be a downward spiral you don’t want to get into, especially if you have a more premium positioning.

I’ll also share alternative ways to generate sales aside from discounts.

?

While occasional use of discounts can be beneficial, excessive and recurrent discounts offered might get the company in trouble, the best examples of industries I have worked in being the fashion or mattress industries.

?

Discounts: the margin killer

Don’t worry, this isn’t an article about how to calculate margins, but it deserves a mention as it’s the most obvious thing we all think about when applying discounts.

Discounts reduce your margins and might not always bring a positive return on investment, especially when adding the marketing costs to advertise about the discount.

?

Discounts undermine retention and loyalty

What I’ve discovered first hand during my career is how the discounts impact the consumers’ purchasing behaviour in the long-term.

?

For a few years I used to help an e-commerce business in the beverage industry, and one of the challenges was that their retention rate and customer lifetime value kept on decreasing at a rapid pace, despite their products being purposed for daily consumption.

Their clients seemed to either stop buying, or reduce their consumption.

So we reached out the client base with a qualitative research to understand the root cause of this behaviour.

?

One main insight that surprised all decision makers in the organisation was that clients had changed their purchasing behaviours accordingly to the availability of discounts.

At the time, every month or so was an occasion to make a discount, and every special day an excuse to reduce the price temporarily in order to attract customers.

?

I remember some quotes we got that showcased that new behaviour.

"I stock up during discounts and wait for the next one."

?“When I can’t find your discounts, I just buy from another brand I also like.”

?

Consequently, the company found itself trapped in a perilous cycle. While discounts were deemed necessary to stimulate sales, they eroded margins, rendering sustainable growth unattainable.

?

It’s the failure of looking at the long-term perspective and always focusing on short-term gains that has been slowly killing the organisation.

?

Losses continue to accumulate year after year, pushing the company to cut costs down, and continue the negative spiralling.

?

On the consumer side, it’s really easy to see how strong and frequent offers can’t be sustained on the long-term:

• New clients that got lured by a hefty discount are unlikely to continue purchasing once they need to pay the full price, unless there is a powerful retention process in place that can change and sustain the new behaviour.
• Your most loyal customers might welcome a discount here or there at first, but continuous discounts might make them feel they’ve been tricked and overpaid for the same product before, or they might wonder why it’s now cheaper, and start questioning if the quality is still the same.

?

We’re seeing this a lot at the moment with the “skimpflation”, where companies remove or replace some premium ingredients to keep their costs down during periods of inflation.

??

As a premium vendor, you can’t compete against cheaper competitors

?One of the mistakes organisations that want to sell premium products make is trying to compete with their lower-priced competitors.

It's imperative to recognize that the customer base for premium products differs significantly from that of budget alternatives, as does the underlying financial model.

Considering my personal preference for high-end pasta brands. I am well aware of the difference it makes to my dishes and will not consider cooking with lower quality pasta brands, despite the extra cost.

As a consumer, I clearly understand that superior quality means a higher price, and I’m fine with that.

Now as a company selling premium quality pasta, you shouldn’t even consider a potential customer someone who has no regard for the quality of your ingredients, and isn’t aiming for making the best carbonara possible. Those people are not your target market, leave them be.

?

I empathize with the pressure leaders get: when sales are low, cash flow running out and the pressure from investors high, what would you do to get some short-term relief?

The easy answer has always been to attract more customers outside of your target market using discounts.

"Easy decisions, hard business. Hard decisions, easy business" as a friend of mine keeps repeating to me.

?

Problem is, once the company has entered the lower-priced market, where competition is better equipped to navigate the market, thanks to their different cost and margins structure, one enters the danger zone, which can’t be afforded for too long, unless a strategic pivot ends up updating the business model.

?

If we can’t focus on discounts anymore, then what are the solutions?

How to combat this downward spiral is not as simple and short-term as providing a discount.

Here are some alternatives to achieve business sustainability without the usage of discounts.

?

Increasing the Perceived Value

In the last Newsletter, I wrote about the long-term gains linked to increasing the consumer’s perceived value towards your brand and products.

?

I invite you to read the article here.

?

If you have created the best product out there but your ability to communicate its value is low, don’t expect customers to buy from you.

?

This is why I believe increasing the Perceived value is paramount to become profitable and sustainable, but it isn’t necessarily the easiest path, as it involves deeply understanding the market and customers you’re currently serving and delivering an overall experience, on par with the superior quality of your products.

?

Finding out the right price for your target market

There aren’t too many ways to influence a consumer’s purchasing behaviour.

It’s either improving a product’s perceived value or its perceived price. So if you have already done the work on the former, and still can’t sell enough products, then you might consider working on finding the most suited price for your target audience.

?

A first mandatory stop is to look at competitors products and prices once again, they might have changed since the last check and might have found a better quality/price fit for the market.

?

Then, performing a price test to see how the current market reacts to different prices can be a suitable idea, if done within the rules and regulations in place.

?

To be clear, this isn’t another discount, but changing the retail prices directly on the website for a specific period of time in order to learn how this impacts conversion and profitability.

?

Results might end up cutting 10% of the previous margins but increase the conversion rate by 20%, bringing a positive cash flow.

?

?Reaching out to a higher target market

Maybe the target market isn’t right, and that’s why the prospects are not converting into customers. One possibility is to modify the marketing strategy to reach a different target demographic that could value a superior offering.

Repositioning to a new target will mean mandatory market research to identify the new personas, their behaviours or needs, as well as auditing the new competition.

?

Adding new products at different quality and price ranges

Lastly, the addition of new products can be beneficial, even though this one can be more tricky depending on investment capabilities and current portfolio.

Specifically, I’m thinking about adding width and not depth to the collection, new products that will have a different cost/price ratio.

If this fits the brand, having a few products with a differentiated value proposition can attract more types of customers, and also gives the possibility for customers to try the cheaper “entry-level” product to experience its quality and get familiar with the brand, before upgrading for the more expensive products.

?

As a conclusion…

We all want to thrive and see our business grow sustainably. Heavy discounting practices are short-term band aids on wounds that need proper care.

?

For my client, the strategic direction is becoming clearer with a strong purpose on being seen as a premium brand in all aspects of the experience, improving the perceived value and getting ready to thrive for the next holiday season with a clear value proposition.