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 B2B companies are turning to pricing strategy and price optimization software to control excessive discounting.
But does that mean all discounting is evil?
In B2C sales, discount pricing 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 a pricing strategy that supports 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 discount pricing 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 pricing 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 a discount pricing strategy 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 pricing strategy is most prevalent in the B2C space, it’s increasingly common in B2B contexts as well.
7 Advantages of Discount Pricing Strategies
Discount pricing can be an effective strategy for increasing sales volume and short-term revenue and profits. However, beware that discounts can actually diminish the perceived quality of the product and reduce customer loyalty. Discount prices may enhance conversion rates, but they also lower the return on each conversion. Blindly implementing a discount pricing strategy just to achieve quick wins is one of the most dangerous decisions you can make. Avoid making these mistakes and develop a discount pricing strategy that is intentional and rewards customers for their loyalty. Here are 5 examples of effective discount pricing strategies that won’t diminish customer loyalty or perceived product value.
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 including discounts in your pricing strategy 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. Referral discounts are a great way to build customer loyalty in target markets. Customers are more likely to purchase if they were referred by someone they trust. Consider offering a discount to both the person referring and the person who was referred. Similar to customer loyalty discounts, referral discounts reward individuals who already converted. The reward will ideally encourage them to continue referring more qualified leads.
In addition to referral discounts, consider offering customer loyalty discounts to promote loyalty and encourage customers to return to purchase in the future. These types of discounts should be extremely exclusive with clearly defined terms. For example, you may want to offer a 10-15% discount to returning customers who are considering renewing their annual software subscription.
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.” Promotional discounts should be used as a short-term pricing strategy to drive sales. Offering promotions too frequently may actually signal to customers that a new, better promotion may be on the horizon, discouraging them from buying now. Short-term discounts and limited offers instill a sense of urgency in buyers. According to an Experian report, promotional emails containing a sense of urgency call to action had at least a 14% higher click-to-open rate.
6) Driving volume
A common pricing strategy in the B2B space is to extend financial opportunities across your customer’s various business units. Volume discounts encourage customers to buy more products. Offering a quantity discount may urge buyers to purchase in bulk. Rather than simply offering a discount price for one product, consider bundling additional services and products with the primary product. Psychologists have proven that customers would rather receive a 2 for 1 deal rather than a 50% off discount. 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 strategy consistently over time, customers learn to trust you for quality and fair prices.
Interested in learning more about effective pricing strategies? Read more to find out about the most Common Weaknesses in B2B Pricing Strategy.