Excessive discounting is a sure way to undermine revenue and weaken the perceived value of your products and services, because it distorts the relationship between price and quality. That’s why many companies are turning to pricing strategy and price optimization technology to control excessive discounting.
But does that mean all discounting is evil?
In B2C sales, discounting that’s too steep or too frequent sends the message to customers that a product isn’t worth full price. People that paid full price feel cheated if you start selling it the next week for 50 percent off. Apple is a great example of how to support the value of products by limiting discounts.
And we’ve all seen retail stores that offer discounts too frequently — they always seem to be pushing a big sale. While this strategy may help in the short term for month-end inventory reduction, it trains customers to hold off on making purchases until the next sale comes around.
In B2B sales, it’s a mistake to offer discounts too easily. Sales reps often use discounts to close a deal, but this strategy sets a bad precedent. When a sales rep is quick to offer a discount, the customer smells blood … and keeps pushing for lower and lower prices.
On the other hand, when discounting is used in an appropriate context, it has the power to support the perceived value of products and services. For example, when a high-end retailer runs a rare sale, it makes consumers feel like they’re getting a great deal on something of high value. It feels good when you’re able to afford an item that you normally perceive as outside your budget. While this strategy is most prevalent in the B2C space, it’s increasingly common in B2B contexts.
Here are seven discounting tactics for achieving specific goals, without undermining your pricing strategy:
1) Improving cash flow: Offering a discount is a great way to give your buyers an incentive to pay you early. If you have 60-day terms for invoices, you might consider offering a two percent discount for payments received within 30 days. This gives your buyer a meaningful financial advantage and improves your revenue management by accelerating payments.
2) Solving problems: When an unhappy customer calls in with a specific complaint, offering a discount, refund or some other reduced pricing may be an effective way to resolve the issue and retain a valuable customer.
3) Reducing excess products and old inventory: When you’re dealing with seasonal products or perishable items with limited shelf life, it may be more advantageous to sell off stock than to keep your prices high. Consider discounts to move these products and avoid steep discounts and inventory obsolescence charges when the new product is available.
4) Breaking into new markets and building loyalty: When you’re expanding into a new market, discounts and loss leaders offer ways to generate interest and motivate buyers to try a new product. Discounts are also useful as ways to build customer loyalty in target markets, such as seniors, students and military personnel.
5) Accelerating the sales cycle: Time-sensitive discounts help speed up sales with offers like, “Buy this quarter and we can extend a 10 percent discount.”
6) Driving volume: A common strategy in the B2B space is to extend financial opportunities across your customer’s various business units. If you have a large, global customer that’s going to buy thousands of items, offering a large discount is useful for winning the business. This approach can fill capacity and increase purchasing power with suppliers, translating into lower costs across all customers purchasing those products.
7) Addressing a competitive threat: Companies in the B2B space try to avoid discounting, but this also creates a possible entry point for competitors. If a competitor is using lower prices to capture your market share, you may want to consider strategic discounts for customer retention and keep barriers to entry high.
As these seven examples show, discounting is an effective tactic for achieving specific goals in specific situations. When used carefully as part of your larger pricing strategy, you reduce the risk of distorting the relationship between the value you provide and the prices your customers expect.
By imposing pricing discipline, you’re training your customers to expect to get what they pay for, instead of expecting a lot of quality for a low price. And when you maintain your pricing consistently over time, customers learn to trust you for quality and fair prices.