If you want to grow your business sustainably, we’ve got to talk about the elephant in the room: discount messages.
Discounting is incredibly common. You know this. You probably see discount messaging daily.
You might even make purchasing decisions based on discounts, like those new running shorts you didn’t really need but bought last Wednesday when your favourite retailer emailed you about a pop-up sale.
If you’re giving discounts, at first glance, it might seem like a successful business model (especially if you see spikes in sales and revenue.)
Here’s the thing:
While there are some advantages of discounts, marking down your prices also carries significant disadvantages — long-term risks that far outweigh the short-term benefits. Here’s why:
The advantages and disadvantages of discounts
Before you begin blasting out discount messages, carefully consider both the pros and cons of discounting.
The advantages of discount messages
If you’re thinking about offering discounts, chances are you (1) need increased sales volume or (2) want to attract new customers.
Discounting will probably achieve these two things and quickly boost your top-line sales.
Your target market might be more inclined to purchase if they feel like they’re getting a good deal, and discounts can attract new customers who might not have otherwise considered your product.
Discounts have other valid benefits, too, like clearing out inventory and incentivising larger purchases.
But here’s what I want you to remember…
The short-term advantages of discounting typically don’t eclipse the long-term negative consequences.
- Releasing a new version of your product (i.e. a technology update)
- In an industry heavily dependent on trends (i.e. fashion)
- Building a brand contingent on discounts (i.e. Groupon)
…I suggest you use discount messages sparingly (if at all.) Let me explain.
The disadvantages of discount messages
1. Profit evisceration
Let’s start with the most obvious con to discounts: short-term financial trade-offs.
If you lower your prices, you reduce your profit margins. Lower them too much, and you might not fully cover the costs of producing or delivering your product or service.
Of course, there are exceptions, like if you’re a SaaS company that can attract new customers without dramatically increasing operating costs. Or if you’ve already invested in developing a product and the price of each additional unit sold is relatively low, you might be able to offer discounts without substantially hurting your profit margins.
That said, analysing your costs and revenue projections is crucial to ensure offering discounts is a sustainable strategy. This is also why you’ve got to know your numbers. The good news? KPIs for digital marketing don’t have to be as daunting as they sound.
2. Negative signalling
Regular discounts send a message to your customers that your product or service is not worth its original price — aka, negative signalling.
Have you heard of the retailer Kohl’s? It’s a popular department store in the U.S. that regularly offers its customers steep promotions and Kohl’s Cash (store credit).
Due to Kohl's frequent discounts, customers now expect lower prices — and the company is facing financial woes.
If you’ve ever shopped at Kohl’s, you can probably attest that you go there for the sales and promotions. When you do pay full price for something at this department store, you almost feel as though you’ve been duped.
Here’s the key takeaway:
Once you begin regularly offering discount messages, your customers will come to expect them. And that means they will hold off on making purchases until a deal becomes available — a problematic factor for your bottom line.
3. Price wars
“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.” - Warren Buffet.
Once one business offers discounts, others may feel compelled to follow suit to stay competitive. This cycle can result in a never-ending loop of price reductions. Before you know it, you’re in a full-blown price war.
While customers might love getting a good deal, competing on price alone is a slippery slope that leads to shrinking profit margins and commoditisation of your brand.
Take it from Warren Buffet: build a brand that can raise its prices without losing customers.
This leads me to my next point…
4. Brand commoditisation
Finally, offering frequent discount messages can lead to the commoditisation of your brand.
In other words, when you regularly discount your products or services, customers begin to question the value of your brand; they begin to make purchasing decisions based solely on price, which means they lose their irrational loyalty to your business and choose the competition instead.
Just look at Tesla’s recent discounting strategy, which has left some analysts questioning the exclusivity and luxury value of the brand.
Is Tesla at risk of losing its premium pricing power and becoming just another electric car in the automotive market? Time — and likely future discounting decisions — will tell.
The solution to discount messages
If discount messages aren't the solution to driving sales and revenue… what is the answer?
The key to growing your company is to shift away from focusing solely on short-term gains — to split your efforts between performance marketing and long-term brand building. In doing so, you’ll deliver value to customers while optimising marketing efforts for maximum impact.
When you hone in on what sets your business apart and create a distinctive value proposition that strongly resonates with your target audience, you establish a clear point of differentiation from competitors and reduce reliance on discounts as a primary sales driver.
Lastly, when in doubt, hire a growth marketing expert with a proven track record for success before you automatically slash your prices. Your bottom line will thank you.