Pros and Cons of Discounting Strategies

Discounting is the most common pricing strategy that is implemented to drive volume. Several factors come into play when dictating which discounting strategy is right for you such as business model, product/service portfolio, and long-term goals. For example, if you are a wholesale retailer, bulk and quantity discounts are most common, but can lead to customers stockpiling and not buying for a long time. Whereas if you are a network provider, you might be more familiar with contractual discounts, which is great to lock customers in but can make it harder to acquire new customers.

Businesses often lack the pricing discipline and analytics to develop sound discounting strategies, resulting in substandard financials. Listed below are some discounting strategies to help you assess if they fit your business needs:

1.??????Unconditional Discounts: Reducing prices to all customers without requiring the customer to undertake any commitment or actions

·???Pro: Great to boost sales and gain new customers.

·???????Con: Excessive discounting can lead to financial loss and harm brand reputation. As well, you could be missing the opportunity to target specific customer segments.

·???????Ex: Walgreens offering 50% off on CeraVe, Clean&Clear, and Aveeno.

·???????When to use: When you want to attract new customers or want to sell low-volume products/services. ?

2.??????Exaggerated Discounts: Large temporary price reductions with the specific goal of customers noticing it.

·???????Pro: Helps in cutting through the marketplace or competitive noise.

·???????Con: Exaggerated discounting is not sustainable (often doing at a loss) or customers will stop trusting your regular pricing.

·???????Ex: Budget airlines offering select eye-catching fares to get noticed and undercut competitors.

·???????When to use: When you want to gain the attention of new customers in a saturated competitive market for a certain occasion or event (new product/service release, holiday, etc.). Implementing these discounts in the long term will negatively impact your customers’ perceived value as they assume the reduction in price translates into a reduction in quality.

3.??????Bulk and Quantity Discounts: Discounts on large purchases.

·???????Pro: Encourages customers to purchase larger quantities.

·???????Con: Leads to customers cutting back purchases of regularly priced items, or specifically buying during discount windows.

·???????Ex: ?uline premium cargo box prices reduce by $3 dollars as the customer moves from purchasing 5 boxes to 25 boxes and so on. ?

·???????When to use: When you want customers to stock up on your offer and inhibit competitor switching (e.g., cash flow, space). ?Additionally, in certain instances, loading up your customer leads to you selling more. For example, tire dealers will increase their throughput if they are carrying more inventory. They are naturally inclined to be more aggressive in seeking and closing deals to alleviate the high inventory situation.

4.??????Contractual Discounts: Discounts are based on contractual requirements and duration.

·???????Pro: Locks customers in for prolonged periods of time in exchange for a price concession.

·???????Con: Contractual discounts are unappealing to new customers, who at times are willing to pay a premium to avoid being locked in.

·???????Ex: $50/month no contract vs. $40/month 1-year contract on your AT&T plan.

·???????When to use: When you want to incentivize initial buy-in and repeat business, contractual discounts are an effective method to attract and retain customers.

5.??????Early/Sign-Up Bonus Discounts: Discounting for early customers and members.

·???????Pro: Creates an incentive for new customers to join or buy.

·???????Con: After benefits expire customers are likely to churn.

·???????Ex: First month free for your business when you sign up with LinkedIn Premium.

·???????When to use: When you want to acquire new customers but does not help in achieving customer loyalty as no intrinsic value is constructed.

6.??????Extended Discounts: Discounts that begin after a set period, or under the basis of extending/renewing a contract or term.

·???????Pro: Encourages customers to continue buying.

·???????Con: Many customers tend to avoid discounts that require a long-term commitment.

·???????Ex: After 12 months your Hubspot Sales subscription reduces from $500/month to $450/month.

·???????When to use: When you want to maintain/retain your current customers?but does not help in the acquisition of new customers as benefits are not immediate. ?

Final Thoughts: As market environments continue to evolve, discount strategies are a proven way to achieve long-term goals for top-line growth. However, the financial trade-offs associated with discounting have to be clearly defined, along with routine post-analysis to understand the impact of the discounting actions, ensuring returns are maximized and in line with corporate objectives. Our team at Revenue Management Labs can help you identify optimal discounting strategies and ensure that long-term strategic goals are met without harming brand value.