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 simply human nature to think lowering the price will bring more customers. After all, we see it almost everywhere, from grocery stores to airlines, car dealers, and fashion retailers. But is it a smart strategy?
To maximize sales and revenue, it's critically important to think twice before offering a discount, and to understand the true impact of what a discount means.
Here’s what I’m talking about...
1) Short-Term Gain = Long-Term Pain
Although it may produce a short-term uptick in sales, offering a discount can dramatically hurt business in the long run.
In starting my coffee company, I quickly learned how easy it was to get blinded by a small surge in sales and lose sight of the bigger picture. In reality, offering a promotion only conditioned my customers to wait for lower prices.
By offering a promotion we were educating customers not to buy at “regular prices”. Not only did this mean a huge cut to our margins, it also devalued our product in relation to our competitors.
Groupon, for example, has led to more restaurants going out of business because it conditions customers to only dine at a particular restaurant if they have a coupon. Groupon, as a result, has struggled to grow its revenue in recent years because so few clients see an ongoing benefit from the platform.
By offering a discount we're essentially telling customers our regular price is too high, and once the sale is over those customers will disappear until the next promotion.
Business then becomes reliant on promotions and coupons in order to stay afloat, and before long we’re running a new promotion every week just to keep traffic coming through the door.
If we stop, the resulting drop in quarterly revenue is too difficult to handle, and we become addicted to this destructive practice.
Instead of constant promotions, there are several other strategies to boost your revenue and keep traffic flowing through your doors.
Q: "If offering a discount is bad, how do I drive sales when business is slow?"
When looking at the retail landscape who are the biggest winners?
It’s companies like Amazon, Walmart, and Costco.
Instead of offering sales or discounts they practice 'everyday low prices' and in-turn have conditioned customers to think they will always get the best price no matter the time of year.
2) Differentiate, Don’t Duplicate
When pricing products and building a brand strategy, you can increase revenue by differentiating yourself from competitors and making it blatantly obvious to consumers they don’t have to "shop around" for the best price.
Rather, they must simply visit your establishment where they're guaranteed the best everyday low price.
Like Walmart, we must market ourselves as the everyday low price leader and build this perception into customers minds.
If there's a better price elsewhere, simply offer a price match, but don’t begin eroding margins for temporary relief – this will only snowball into more destructive effects the road.
Q: "The grocery industry is constantly running promotions, how come they stay in business?"
True, however, the hook which keeps the grocery industry alive (other than the fact everyone needs to eat) is that sales are simply meant to drive traffic to the store, after which the store rely's on the purchase of additional (regular price) items to cover their loss (knows as a loss leader).
Having spent 7 years working in the grocery industry for the two largest food and beverage companies on the planet (Coca-Cola, and Nestle) I’ve seen this first hand...
If there's a sale on Coca Cola Classic, for example, it’s not Coca Cola offering the discount; Coke sells their product to the store at regular wholesale price.
It’s the grocery store who takes the margin hit because they know 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 a retailer doesn't have hundreds of available products like a grocery store, it would be incredibly destructive to offer a discount or promotion on a such a small product line.
Instead, they could offer a free giveaway or door prize to help build awareness, while not cutting margins on their bread and butter.
Q: "What if my margins are just too high and I simply can’t afford to offer the lowest price on the market?"
In this case, rather than branding oneself as the “everyday low price” leader, the best strategy is to take the exact opposite route, and market as THE premium, high-end product.
Take Apple for example. Apple's laptops cost thousands of dollars and never go on sale, even though we can 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 $268 billion.
Because Apple has branded itself as the industry leader with an incredibly high-quality, exclusive product.
It’s because of this high-end image Apple can charge more for its products without ever having to offer a sale to drive traffic...
3) It Pays to be Superior
Branding yourself as the premium product in a particular category 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 to $1,000 price range, each offering promotions to undercut the competition.
Toshiba, a long-time laptop manufacturer, filed for bankruptcy because they could no longer compete, yet Apple maintains its position as the premium brand 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 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.
Take it from me, avoid getting blinded by short-term gains, this will only result in long-term loses.
I quickly realized by offering a discount there was almost always someone else out there willing to sacrifice their margins slightly more to beat my pricing. If I hadn't changed my ways this would have led to a price battle leaving us both bankrupt.
Market yourself as the everyday low price leader, thus building the perception into consumers minds the only place to go for the best price is your establishment.
The biggest hurdle to avoid is educating customers to wait for a deal, thus entering a vicious downward spiral and constantly chasing quarterly revenue targets.
If unable to offer the best available price, take the exact opposite strategy as the ultra-premium high-end product.
Build prestige and exclusivity around your brand and charge a premium price. This will result in fewer units sold yet higher margins, greater profits, and lower maintenance customers for your business.