Discounts are reductions that are made from the regular price of a product or service in order to obtain or increase sales. These discounts—also commonly referred to as sales or markdowns—are utilized in a wide range of industries by both retailers and manufacturers. The merits of discount pricing, however, have been a subject of considerable debate over the past several years, as analysts argue about their effects on short-term sales, longer term profits, brand loyalty, and total supply chain costs for retailers and manufacturers.
Discounts are a staple of business strategy for many retail firms. As Tom Hartley noted in Business First of Buffalo, sales remain "the fuel that drives the retail engine." He cited the views of several retail experts who flatly insist that sales promotions are integral to most retailers' success. "The name of the game is promotion," one expert told Hartley. "Sales are the only way to drive the business and retailers have to have them, even if they seem to be going on all the time. Discounting in America has been built into the retail cycle. It is no longer a big deal."
But small retail firms should make sure that they go about the discounting process in an intelligent fashion. Business consultants cite several considerations that small retailers should weigh when putting together their overall marketing strategy. For example, retailers should beware of overuse. Indeed, according to many economists and business owners, discount periods increase sales volume, but they also deepen sales troughs in between sales. Other analysts contend that frequent sales tend to numb customer response over time, and Hartley pointed out that "many retail experts think consumer have become less trustful of retailers who they see running weekly sales, or marking up items so high that they make a profit even after slashing prices 20, 30, or 50 percent."
In addition, retailers should study historic customer response, inventory levels, competitor pricing, seasonal cycles, and other factors in determining the level of discount. Some businesses are able to dramatically increase sales volume through discounts of 20 percent or less, which in many instances enables them to maintain a decent profit margin on sales. Other businesses, though, may have to offer discounts of 40-50 percent (because of seasonal considerations, industry trends, etc.) in order to see meaningful increases in traffic. Of course, some retailers employ a price philosophy that emphasizes every-day low prices in the hopes that the increased volume will make up for the small profit margin on individual sales.
Manufacturers, meanwhile, should be very careful in establishing discounts for their goods. Recent studies have indicated that price promotions offered by manufacturers often set a dangerous precedent and condition customers to make purchases based on price rather than brand loyalty. "Over the long term," claimed Management Today contributor Alan Mitchell, "[discount pricing initiatives] do precious little to improve base-line sales, increase the incidence of repeat buying or attract new customers. They do, however, undermine other marketing initiatives by sensitizing consumers to price." A top manufacturing executive agreed with this analysis, noting that "[manufacturers] are actually training consumers to hunt around, to look for high-value offers. We're either encouraging them to shop up heavily when the offer appears and distort the supply chain, or we're really annoying them if they miss the offer because it's just stopped. Net, we're undermining their loyalty." Finally, ill-considered discount sales can lead to price wars with other competitors and can tarnish the image of the brand in question.
There are other drawbacks often associated with discount sales as well, and these can quickly get an unsuspecting small business owner in serious trouble. Sales & Marketing Management contributor Minda Zetlin noted, for example, that "discounts have a way of taking on a life of their own." Indeed, the customer that receives a 15 percent discount for one purchase may well feel entitled to an identical or even greater discount the following year. Moreover, news of a discount extended to one client is often difficult to keep under wraps, and when one client finds out that his deal is not as good as the one that another client is getting, he is apt to react in ways that are not good for business. "What happens is customers talk," one executive told Zetlin. "You get a call from Fred, who thought he was getting your best deal, and found out last night at the bar that he isn't and is now unhappy with you." One way of minimizing the likelihood of running into such complications, say experts, is to make sure that you adhere to a uniform set of discount rules. Of course, some small business owners have to give customers different deals as part of their efforts to establish and grow their enterprises. Nonetheless, as one businessman recounted to Sales & Marketing Management, "[with] indiscriminant discounting … you wind up giving different deals to different customers based on their negotiating ability rather than some more rational technique."
Many businesses utilize sales representatives to deal with customers and close deals. But whereas sales personnel employed by retail outlets typically do not have the power to offer discounts, many representatives in the manufacturing and service sectors are provided with some leeway by their employers in this area. Both existing and prospective customers on whom they call are well aware of this state of affairs. Small business owners, then, need to pay extra attention to this reality as they build their sales force. For as business experts in all industry areas will attest, many sales representatives are so eager to secure a sale—and thus a commission—that they will offer a discount on a sale at the first hint of a price objection. "Salespeople offer discounts too quickly because they get flustered and fear losing a deal, or because it's easier than making the customer understand why this product is worth more," wrote Zetlin.
To head off scenarios in which salespeople might unnecessarily fritter away profits on a sale with an unnecessary discount offer, business consultants and successful salespeople recommend that entrepreneurs consider the following:
In addition to traditional discounts, wherein individual goods or services are offered at a given percentage below the original asking price, small business owners also have the option of instituting several different discounting variations, such as "earned" discounts, early-payment discounts, and multi-buy promotions.
"EARNED" DISCOUNTS Some companies offer their customers discounts if they meet certain requirements. Under this scenario, customers that agree to make large purchases, provide repeat business, or sign multi-year contracts are in essence rewarded for their business by receiving a discount on the price of the goods or services they have purchased.
EARLY-PAYMENT DISCOUNTS Some small business owners offer discounts to customers who pay promptly (within 10 days is a common stipulation). Small businesses that do this are often relatively new firms that are operating under tight financial constraints. Unlike established business owners, who may have a financial cushion from which to draw to meet various business and/or personal obligations, entrepreneurs are often in greater need of securing prompt payment from customers. An early-payment discount provides customers with an incentive for them to make payment quickly. Businesses that utilize this discount option range from manufacturers to freelance writers.
Business consultants warn, however, that some customers may abuse this option by taking the early-payment discount, only to pay off the bill after the discount period has ended. Christopher Caggiano noted in Inc. that small business owners can institute a couple of different policies that can curb such abuses. One device that entrepreneurs can use is to make it clear that the early-payment discount will be offered only if collection can be made in person by the entrepreneur himself or a member of his staff. Another option is to charge customers for the difference on the next invoice that they submit. In most cases, the customer will pay the amount without complaint since it did not meet the previously agreed-upon terms.
MULTI-BUY PROMOTIONS Multi-buy promotions are an increasingly popular alternative to the standard discount pricing strategies, especially for retailers. Rather than knock 25 percent off the price of a product, some companies are choosing to offer "buy one, get one free" or "buy three for the price of two" promotions to consumers. This strategy is driven by statistics that indicate that such promotions are often so tremendously popular that the volume of sales outweighs the cost of the discount given. Business observers point out that many multi-buy promotions are made economical by the hidden savings that can be realized through them. "Supermarkets now have computer systems which recognize a second or third pack and automatically adjust the bill at the till, thereby eliminating most of the administrative hassle," wrote Alan Mitchell in Management Today. "And the fact that the goods being promoted come in standard packs eradicates many of the design, manufacture, and transport costs associated with other types of promotional offers."
Caggiano, Christopher. "Customers Take Our Early-Payment Discount—But Pay Late." Inc. October 1997.
Coleman, Calmetta. "The Evolution of Gift Giving: Deep Discounts Help to Draw Wary Shoppers." Wall Street Journal. November 27, 2000.
Courty, Pascal. "Timing of Seasonal Sales." Journal of Business. October 1999.
Farber, Barry J. "The High Cost of Discounting." Sales & Marketing Management. November 1996.
Hartley, Tom. "You Always Hear the Word 'Sale'—But Does It Work?" Business First of Buffalo. March 23, 1992.
Marn, M.V., and R.L. Rosiello. "Managing Price, Gaining Profit." Harvard Business Review. September-October 1992.
Mitchell, Alan. "Multibuys that Wash." Management Today. May 1996.
Peppers, Don, and Martha Rogers. "Avoid Price Dilution By Making Yourself Valuable to Loyal Customers." Business Marketing. December 1997.
Rasmussen, Erika. "Leading Edge: The Pitfalls of Price-Cutting." Sales & Marketing Management. May 1997.
Walker, Bruce J. A Pricing Checklist for Small Retailers. Small Business Administration, n.a.
Winninger, Thomas J. Price Wars: How to Win the Battle for Your Customer. St. Thomas Press, 1994.
Zetlin, Minda. "Kicking the Discount Habit: Teach Your Sales-people to Stop Leaving Money on the Table." Sales & Marketing Management. May 1994.
SEE ALSO: Rebates