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 that lowering your price will bring in 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?
As a business owner, it's critically important to think twice before offering your next discount and to understand the real 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 your business in the long run.
The worst part: it’s incredibly easy to get blinded by this small surge in sales and lose sight of the bigger picture, when in reality, offering a promotion only conditions customers to wait for lower prices.
By offering a promotion 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 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 opt to return to the platform.
By offering a discount you're essentially telling customers that your regular price is too high, and once the sale is over those customers disappear until the next promotion.
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.
Q: "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.
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.
2) Differentiate, Don’t Duplicate
When pricing your product and building your brand strategy, differentiate yourself from your competitors by making it blatantly obvious to consumers that they don’t have to "shop around" for the best price. Rather, they must simply come to your establishment where they're guaranteed the best everyday low price.
Like Walmart, you need to market yourself 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 start eroding your 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 that keeps the grocery industry alive (other than the fact that everyone needs to eat) is that sales are simply meant to drive traffic to the store, after which the store rely's on the sale of additional items to cover their loss (knows as a loss leader).
I spent 7 years working in the grocery industry 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, offer a free giveaway or door prize to help build awareness, but don’t cut margins on your 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?"
If this is the case, rather than branding yourself as the “everyday low price” leader, the best strategy is to 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 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 that 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 - $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 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 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.
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 only result in a price battle that leaves you both bankrupt.
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 customers to wait for a deal, and you’ll enter a vicious downward spiral, constantly chasing quarterly revenue targets.
If you can’t market yourself as the best available price, take the exact opposite strategy and brand yourself 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 but higher margins, greater profits, and lower maintenance customers.