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During times of economic recession such as the one we are currently experiencing with COVID-19, many companies tend to discount their products in hopes that it will incentivize customers to buy their products. However, recent studies show that for most companies (with the only exception being discount stores and some businesses which deal with disposable products), discounting is probably hurting your business more than it is helping.
One of the world’s greatest investors, AKA the Oracle of Omaha, AKA Warren Buffet, went so far as to say that discounting is for dummies. In a recent article in Fortune magazine, Buffett said he tends to advise his companies—when responding to competitive challenges—to either raise their prices or hold them steady. However, raising your prices should not be confused with price gauging, which can be immoral and even brand suicide.
While discounting may sound like a great way to increase sales, especially when demand is low, it’s almost always harmful, even if you insist the discount is a one-time deal. Discounting lessens the perceived and therefore, actual value of your product or service. If a customer asks and receives a discount for whatever reason, then your product’s perceived value automatically goes down.
Think of it like a stock or any other tradeable asset. Its value goes up or down according to how much someone is willing to pay for it. When you discount, you train your customers to think of your product as worth the discounted price rather than the original. So when the price returns to normal, it will seem expensive or inflated.
The same is true when your competitors start undercutting your price. Instead of getting into a price war, it’s better to keep your prices stable and to invest in the three things that are more important to customers than price: Relationship, Convenience, and Uniqueness.
Let’s quickly look at the main ways discounting hurts your business.
It creates an expectation of future discounting. Because your earlier discounts have lowered the bar on the perception of value, why should they pay more? Would you? Discounting sets a bad precedent that undermines your future opportunities to maximize margin.
It complicates your business dealings. Particularly in B2B or products that are negotiable, when you offer a discount to one customer but not to another (perhaps because they didn’t push as hard for it), you are suddenly operating under different price structures for likely the same product. A variety of pricing levels can create internal chaos and administrative nightmares, especially in larger organizations with more extensive customer bases.
It indicates a lack of confidence in your product and erodes trust in you. Back to the idea of value; even if the customer doesn’t value your product from the beginning, then when you start to discount, it shows that you don’t believe your value proposition either. Prospective customers sense this lack of confidence and question two things: 1. Is this product as good as I thought if they are willing to accept less? And 2. Can I really trust this person who wants me to buy it?
It squeezes your profit margin. I think we all know that if you sell a product or service at full price, your margin will be higher than if you sell at a discount. The profit margin you lose through discounting must be made up for in future opportunities, causing you to spend more on sales efforts to close more deals at a higher price.
It forces you to cut corners (or at least consider cutting them). Once you return to full price after selling at a discount, it is tempting to find ways to lower your costs—either by reducing material costs or minimizing the activities associated with delivering the product. While it is always a good idea to find ways to operate efficiently, if you feel forced to lower your costs unnaturally, you could quickly end up damaging your perceived value even further.
The best alternative to discounting is to be clear and confident in presenting your value proposition. It should be irrefutable that the prospect will receive an equitable return on investment and be well worth the price. In reaching that awareness, it is reasonable for the potential customer to ask questions, offer objections, and seek the best deal. These questions are all part of their due diligence as they represent their interests. But suppose you can answer their questions and overcome objections clearly upfront. In that case, the value of your product or service will become appreciated, and the quoted price will be supportable.
Some other reasonable alternatives to discounting would be to look for ways to reduce or eliminate unnecessary components from your product. Make cuts without risking the customer’s satisfaction with your product. These cuts can make the deal possible while allowing you to stay true to your standard pricing. The last better alternative is just to say no! It empowers you (and your prospect) to find a better fit elsewhere and avoids an unprofitable exchange.
Remember, you have two choices when attempting to equalize price and value. Always choose to raise value over lowering your price. Your customer will “get what they paid for,” and you just made more money and avoided long-term issues!