Should You Offer a Discount?
Jan 24, 2019
By Barry Thomsen
Price discounting can be an effective marketing tool for a small business. However, it is best utilized in special situations, for example, in markets where buyers are bombarded with competing advertising messages.
Price breaks can be temporary or semi-permanent, but their use should be carefully monitored to ensure they are getting the intended results. Keep in mind that if you offer too many temporary discounts you risk giving customers the impression that your regular prices are too high. After all, why would anyone purchase your products or services at the regular price if a discount is right around the corner?
Here are some ways to use discounts most effectively:
- Move excess or old merchandise—if you over-ordered or over-produced certain products, a discount could move them quickly. Items about to become obsolete or go out of style need to be moved out before they become unsellable. Less money is better than no money.
- Seasonal sales—a discount on seasonable products can greatly increase sales when the selling season for those products is just starting or almost over. Keeping leftover products until the next year is risky because styles might change or new innovations may be introduced.
- New products—introductory lower prices will start word-of-mouth advertising in motion to spread the new idea to other customers quickly.
- Larger quantity orders—a common practice in business-to-business sales is buy more/save more. Some type of discount should also be offered to consumers who purchase larger quantities of an item than the average buyer.
- Senior citizens and students—special interest groups can build more volume and bring public awareness and goodwill to your business. Discounts will encourage them to tell their friends and send referrals.
- Perishable items—selling at reduced prices is better than disposing of items whose shelf life or expiration date is nearing the end. Some return is always preferable to a loss.
- Break into a new market—when you discover a new target market for your products or services, lower prices can help you acquire new customers quickly. This will give you a chance to see how you’re being received in these uncharted waters.
- Build volume—you may want to increase volume and sales so you can take advantage of volume discounts from your suppliers. If you’re thinking about selling the business, higher sales figures may make the company more attractive to potential purchasers. The discounts will also serve as a temporary bonus for your regular customers.
- Capture the visitor market—a retail business can go after some of the out-of-town visitors who travel through your area. Advertise your discount where they will see it, in tourist guides, newspapers, etc.
- Increase cash—when your cash flow needs a boost and you have a lot of product on hand, discounts can be a productive tool. Lower prices may also draw in a few new customers who may want to try your company and will make a first purchase at a lower price.
- Prompt payment—to speed up accounts receivable, offer a discount for payment by a specific date, perhaps 50% shorter than usual terms. Many budget-conscious customers will jump at this kind of offer.
- Raise cash—if you’re in a business that usually sends invoices to customers, try a discount for cash in advance or on delivery. It will be an incentive to the customer and increase your cash flow quickly.
- Deal with competition—when an aggressive competitor has reduced its price, you can offer a discount to meet or exceed it. Be careful not to start a price war where everyone loses.
- Loss leader—products can be discounted to cost or a even a bit below cost to bring customers in. Hopefully they’ll also purchase other, more profitable, items.
- Advertising strategy—discounts will draw more attention to a new ad campaign, adding to its success.
- Point-of-sale—when a customer is on the verge of buying, but needs a nudge, a small discount may provide the extra incentive he needs to do it now. A lower price to upgrade or add additional products can also increase sales.
- Solve a customer problem—if an order was shipped incorrectly but the customer can still use the merchandise, a discount can often smooth over the situation. It may be better to make a smaller profit or break even than to inconvenience—and possibly lose—a customer.
Discounting is productive if it’s used under the proper circumstances. Seeing your phone lines light up because of a special offer is a terrific feeling. But if you resort to discounts too often, your discounted price will soon become your regular price and you’ll experience lower profit margins.
Are you having trouble keeping track of discounts and their impact on your bottom line? Learn how to organize your finances with this AMA Webinar.
About the Author(s)
Barry Thomsen is publisher/editor of the Small Business Idea-Letter and Small Business Advisor. To receive a free copy of the Idea-Letter, contact him at [email protected] or via www.idealetter.com