Slashing prices may be an effective way to attract new customers. But is it worth the ultimate cost and profitability you sacrifice? Here are five important questions all small business owners should consider before deciding to offer deep discounts.
1.Will your discount attract the customers you really want? When demand lags or sales are unpredictable, it may seem like any paying customer is worth acquiring, regardless of what you must give up to attract them. But it’s important to know what type of customer a discount is likely to attract so you can plan your future marketing strategies appropriately.
Elise Walton, owner of Balanced Harmony Massage learned that lesson when she offered a deep discount through a daily deal site, in an effort to gain new clients. Though her discounted offer (more than 50% off regular prices) did bring in more than 200 new customers, not one returned after they had redeemed the deal. In the surveys she distributed, most gave the same explanation. They had a great experience—but they said they were only deal shoppers. “I have not done any more deep discounts, and have a different approach to get and retain clients now,” says Walton.
2. Have you considered the impact to your brand? As the saying goes, perception is reality. If you intend to charge a premium for your products down the road because you believe what you offer is superior, think about the impact discounts can have on your brand image. (It’s also important to consider how you’ll deal with customers who pay full price, and find out about your discount).
Dennis Michael of Wake Creative realized the negative connotation discounts have on perception in his early years as a business owner. “I was getting the reputation as the ‘cheap guy’. The wrong type of client was gravitating to me because I discounted myself.” Eventually, Michael began charging what he felt he was worth. He says his reputation became more credible, and his own pride and accountability in his business increased, too. Because he knew that customers were willing to pay a fair rate for his service, he was more committed to delivering a superior product.
3. Do you have a plan for how to demonstrate value once the discount ends? If you determine that you are willing to offer deep discounts in exchange for short-term business gains, formulate a plan for how you’ll retain customers when the time comes to increase prices and/or eliminate the discount. “When I ran into a client looking for a discount, I would tell them no. If they griped over price, I would not budge. Instead of discounting my price, I began adding extras into my quotes that were easy for me to bang out but gave the client added value,” says Michael .
4. Can you control the message (and who sees it)? Eric M. Ebert of Lookeen says once his software firm once offered deep discounts on their website, they learned that customers begin to perceive that as the “go to” price. Unless you find a way to fine tune who receives special offers, based on your marketing strategy. For example, his team noticed that an influential cooking blogger had remarked about their software on social media. “We reached out to her and offered to do a giveaway on her blog. We reached a whole new audience we would not have with our own website, without having to devalue our product,” says Ebert.
5. Have you optimized price and value? If you need to discount to drive business, John B. Dinsmore, Ph.D, assistant professor of marketing at Wright State University says to be strategy n how you price and communicate discounts. “People often discount their products or services in hopes of offering a price that will get people to purchase; that price point is known as “price sensitivity.” (For example, if your customer thinks a bottle of water should not cost more than $1, they probably won’t pay beyond that).
“But you can do other things to get people to pay more by bundling products,” explains Dinsmore. (Instead of trying to sell a bottle of water $1.50, for example, you can bundle it with a sandwich for $7). “Even if a sandwich and a water would usually cost $8.50, you are getting $7 instead of $1.50 from that customer and potentially, more overall profit.”