It’s a sensible question because we see discounts every day in all sorts of businesses, so the temptation to discount in ours is natural. Your sales team loves them; it makes life easier for them. Customers always like a deal.
Yet when is a discount good for business and when is it not?
You discount for volume sales, don’t you? Not necessarily. It depends on your business.
In manufacturing there are often high costs to set up production. Producing a prototype is expensive because of those costs. So, manufacturers like quantity. When you design the product, you think carefully about how it will be made. You can then look at how many you need to sell at what price to break even. It will often be thousands of units sold to recover the set up costs.
If you can sell those thousands quickly, and more, in an order, then those units beyond breakeven are profitable. If the number ordered is significantly more than the breakeven point, then giving a discount to win the order makes sense. You’re covering costs and making money by winning an order.
What if you provide services? There isn’t the same high set up cost. Most service offerings are profitable from the outset. There is no advantage to discounting. Your service is unlikely to be bought purely on price – there will be other factors around quality and reliability. A discount only becomes worth considering when your customer is committing to a long-term engagement. Even then you would not call it a discount but a preferential rate to recognise the relationship being longer term (maybe with penalties for early termination).
In retail you may have positioned your business as a discount operator. Discounts will be central to your reputation. Removing them and being honest about your prices might even be counterproductive. The customer expects a discount and feels cheated if it’s not there. Conversely a high-end retailer will avoid discounting as it damages brand value. Better to dispose of unsold stock in other ways.
Buyers do not buy on price alone. Quality, reliability, continuity of service, design, colour, and social status are some of the factors that influence buying. Buying is at its most basic an emotional response. It is only after we have decided that we rationalise the purchase. Why else do many young men covet that expensive fast car? It does the same job as a more utilitarian vehicle. But how does it make them feel?
Look at what you are wearing. Did you buy it simply because it keeps you warm? No – because you felt it would look good on you. No rationale – simple emotion.
So, before you discount understand your customer, their needs, their motivation and your cost base. Then find the most appropriate mechanism for the circumstances. Discounting is the last resort unless it is central to your business model.