As a business owner, what’s the first solution we tend to think of when sales are down?
If you answered “offer a promotion", discount or some other type of sale, you’re not alone.
It’s simple human psychology to want to lower your price to bring in more customers. After all, we see it almost everywhere, from the grocery stores to airlines, car dealers, and fashion retailers. But is it a smart idea?
Before you offer some type of pricing discount you should think twice and understand the real impact of what you’re about to do. Here’s what I’m talking about.
Short-Term Gain = Long-Term Pain
Although it may produce some short term gains, offering a discount to boost sales can drastically hurt your business in the long run.
Sure, the short-term effect of a promotion may produce a small uptick in sales, but the long-term effect is usually the exact opposite. It’s easy to get blinded by a near-term surge in sales and lose sight of the bigger picture, when in reality, offering a promotion only conditions customers to wait for lower prices.
Essentially, you’re educating your customers not to buy at “regular prices”. Not only does this mean a huge cut to your margins, it also devalues your product.
Groupon, for example, has been responsible for putting more restaurants out of business because it conditions people to only eat at a particular restaurant if they have a coupon. Groupon, as a result, has also struggled to maintain its recurring revenue because so few clients see a benefit, and thus fail to return to the platform.
You see, by offering a discount or sale, you're essentially telling your customers that your regular price is too high, and once the sale is over you’ll see those customers disappear until your next sale.
Your business then becomes reliant on promotions and coupons in order to stay afloat, and before you know it you’re running a new promotion every week just to keep traffic coming through your door. If you stop, the resulting drop in quarterly revenue is too difficult to handle, and you become addicted to this destructive practice.
If offering a discount is bad, how do I drive sales when business is slow?
When we look at the retail landscape who are the biggest winners? It’s companies like Amazon, Walmart, and Costco. Why? Because instead of offering sales or discounts they practice “everyday low prices” and in turn have conditioned their customers to think that they will always get the best price no matter the time of year.
Differentiate, Don’t Duplicate
When pricing your product and building your brand, you need to ensure you differentiate yourself from your competitors by making it blatantly obvious that if consumers want the best price they don’t have to go looking for a sale elsewhere, they simply need to come to your establishment where they are guaranteed to find the best low price.
Like Walmart, you need to market yourself as the “everyday low price” leader and build this perception into customers minds. If they find a better price elsewhere you may offer a price match, but don’t start eroding your margins for temporary relief – this will only result in negative effects down the road.
The grocery industry is constantly running promotions, how come they stay in business?
Yes, that’s true, but the hook that keeps the grocery industry alive (other than the fact that people need to eat) is that the sale is simply meant to drive traffic to the store, after which the store rely's on the purchase of additional items, thus covering the store's loss on the sale.
I spent 7 years working in the grocery business for the two largest food and beverage companies on the planet, Coca Cola, and Nestle, so I’ve seen this first hand.
If there's a sale on Coca Cola Classic, for example, it’s not Coca Cola that is offering the discount; they sell their product to the store at the regular wholesale price. It’s the grocery store that takes the hit on their margins because they know that by offering a discount on Coke Classic it will attract customers to the store, and hopefully result in the additional purchase of regular priced items.
Assuming you don’t have hundreds of available products like a grocery store, it would be incredibly destructive to offer a discount or promotion on your only product. Instead, you could offer a free giveaway or door prize to help build awareness, but don’t cut margins on your bread and butter.
What if my margins are just too high and I simply can’t afford to offer the lowest price on the market?
If this is the case, not to worry. Rather than branding yourself as the “everyday low price” leader, you can take the exact opposite route and market yourself as the premium, high-end product.
Take Apple for example. Their laptops cost thousands of dollars and never go on sale, even though you can go out and buy a Samsung laptop for less than $500. Yet sales continue to soar and Apple now has an $800 billion market cap, with Samsung a mere $268B. Why? Because Apple has branded itself as the leader in the industry with an incredibly high-quality, exclusive product. It’s because of this high-end image that Apple can charge more for its products without ever having to offer a sale to drive traffic.
It Pays to be Superior
Branding yourself as the premium product in a particular retail space has major benefits, namely higher margins, thus having to sell fewer units to reach profit targets. It also means fewer competitors (if any), as well as lower maintenance customers, thus fewer headaches, and better customer service.
The laptop market, for example, has quite a few players at the $500 - $1,000 price range, each offering promotions to undercut the competition. Toshiba, a long-time laptop manufacturer, recently filed for bankruptcy because they could no longer compete, yet Apple maintains its position as the world leader in laptop computers with a price point 5x greater than the rest of the market.
This works only because Apple has built the perception into consumers minds that they are the best and most superior product available. As a result, they attract a more affluent consumer with more disposable income to spend on additional Apple products, thus building a deeply entrenched brand loyalty and cult-like following.
Key takeaway: Don’t get blinded by short-term gains, this will only result in long-term loses. Remember, if you offer a discount there will almost always be someone else out there willing to sacrifice their margins even more in order to beat your pricing. This will eventually result in both of you going bankrupt.
It's best to market yourself as the “everyday low price” leader, thus building the perception into consumers minds that the place to go for the best price is always your establishment. Otherwise, you’re simply educating your customers to wait for a “deal”, and you’ll enter a vicious downward spiral of constantly chasing quarterly revenue.
If you simply can’t market yourself as the best available price on the market, take the exact opposite approach and brand yourself as the high-end category leader. Build prestige and exclusivity around your brand and charge a premium price for your product. This will result in fewer units sold but higher margins and greater profits.