Caution: Discounting could be your worst pricing strategy right now!

Discounting could definitely be your worst pricing strategy coming out of lockdown.

Many businesses are looking to discounting to regain the momentum and sales volumes they have lost during lockdown. 

So why is discounting so popular?

Well, to be honest, most effective discounting is used at the retail level to attract or drive shopper behaviour and not necessarily driven by the independent brands on discount.  Retailers have strategies around using some products at discount to attract customers, who are then likely to purchase a basket of offers whilst in-store, and the retailer can then regain their profit through these other items.  So yes, if you have a range of offers available, it is useful to have lower priced items (these need not necessarily be on discount mind you) that can attract customers who you should then sell other things to.  Another use of discounting which is also used regularly by retailers, is to ensure stock rotation and thereby release cash for more profitable items.  When an item does not sell quickly enough, and may even be at risk of expiring, it is better to get some cash for them than risk nothing at all.  Basically the risk here is making a total loss, so the items get discounted so that they can free up some cash to buy other items that will sell.  These slow items are then not likely to be purchased for selling on again.  It is this retailer behaviour, and the resultant influx of customers, that has got us believing discounting is a valid option that works very well.  It seems logical that when you reduce price you encourage volume, but…

…the hidden costs almost certainly outweigh the benefits.  Let me show you how…

When you discount, you NEED an equivalent increase in sales volume just to make the SAME amount of profit.  If I discount my offer by 20%, I need an increase in sales volume of 20% to make up for the 20% I would have usually made at the old sales volume.  Only if my discount results in an increase of sales of MORE THAN 20% will I make more profit.  Think about it.  So don’t discount if you don’t have data to support the fact that your volumes will increase disproportionately more.  Definitely don’t discount if your profit margins are already slim and you are battling to make ends meet. There are more risks to consider too…

The next issue is WHERE those increased sales volumes will come from?

If they are coming from existing customers who are likely bulk-buying at the reduced price, then you may be merely forfeiting future sales which would have been made at the normal price.  Your customer’s purchase behaviour will likely move back to normal at the return to the normal price.  Jim normally buys 1 pack a week, but on discount special he buys 3, and then doesn’t need to buy for another 3 weeks.  What you may hope for is that your customer’s consumption patterns change, that they get used to increased consumption over the discount period and then don’t return to their normal consumption patterns again.  This relies on your in depth knowledge and research of consumption patterns in your market and of course, the general behaviour of the category you are in – information which most of us don’t have at our fingertips  You can also , of course, encourage increased consumption in ways other than discounting.

If your increased discounted volumes are coming from new customers, you have to ask yourself:  How many of those new customers will continue to purchase once you return to your normal price level?  You may be giving customers who normally cannot afford you a chance to sample your offer at a reduced price, but their income levels won’t necessarily change when you go back to the normal price, and they may just return to your lower priced competitor.  You just dropped your profits for people who can’t afford you anyway.  Granted, you may get some of them used to your offer and they may not want to return to their cheaper alternatives again, BUT, they became your customers at a lower price level, a price expectation they will hold forever for your offer.  Their perception of the value of your offer actually reduces when you put the price back to normal.  It’s like getting into satellite TV at one price and then they hike the price up suddenly. You’re setting yourself up for some very unhappy customers!

Effect on existing customers

The other effect of bringing a whole lot of new customers into your offer is the effect it has on the perception of your offer from existing customers.  When existing customers, who may have built up a brand perception of your offer already, suddenly see lower income demographics moving into their perceived category with them, their perception of exclusivity is diminished.  How exclusive is a Rolex if everyone is now wearing one?  What’s more, your customer experience and service levels may be affected if you are suddenly dealing with a higher influx of customers, and your previous loyal customers may not be able to get the service they were used to.  You then risk losing these previously loyal customers, possibly brand ambassadors within their higher income markets, who were happy to pay full price, to customers who already think you a bit too expensive.  And remember, your loyal customers likely provide the bulk of your sales volumes anyway.  This is the marketing equivalent of throwing out the baby with the bathwater, or biting the hand that feeds you.

Effect on brand image

This brings us to a deeper and more long lasting issue of discounting, which refers to damage to your brand equity or brand image.  By using discounting as a tactic over a longer period, you create 2 deep seated issues: one is a market that expects discounts and then only buys when you are on discount, which is in essence a “fake”, lower income market (with fake consumption habits and volumes) and likely to transfer to a competitor who discounts more at any moment.  Customers bought by price are just as easily lost by price and regaining them can only lead to very unprofitable price wars.  The other is a shifting of the quality or premium perception of your brand.  By discounting regularly (or sometimes even sporadically) the expectation of the quality or premium of the offer that can be maintained at the lower price will surely drop.  Where your customers may have believed a certain premium or quality was underscored by extra effort, or higher quality inputs, when you discount, that belief is challenged: “How can they be giving me the same quality at a reduced price?  Something in the quality has changed!”  Furthermore, customers may also deduce that if you can survive or continue to operate on reduced pricing, that you may have been charging extraordinary premiums previously, i.e. they were being ripped off.  Thus discounting can severely undermine the trust customers have in your offer and brand, which is the fundamental building block of brand equity, taking massive time, effort and cost to establish in the first place, but even harder to rebuild.

So what CAN we do if we desperately need to encourage customers to buy again and regain our sales volumes?

We’re going to take a step back here and look at some of the fundamentals of pricing.  My simplified view of price is that it is the monetary value associated with the expected utility of an offer.  Pricing has replaced bartering, where we would match the utility of one item with another.  The word utility is of course equated to usefulness, and how useful I perceive or expect this offer to be in meeting my need.  Utility, I might add, is hugely subjective to the buyer, indicated by the words “expectation” and “perception” used.  A glass of water to someone in a desert has a whole different utility to a glass of water to someone sitting in a fresh mountain stream.  “Good Value” is perceived by the buyer when the expected utility meets or exceeds the price.

We can think of this in terms of an equation below where Value is created (i.e. value is 1 or greater) when utility is equal to or greater than cost/price:

But I prefer to look at it in sense of a balance of scales as per below, where value is created when utility is equal to or outweighs cost/price:

So whilst discounting looks at adjusting the price to affect the value, there are many ways to look at adjusting the utility of an offer to improve the perception of good value, which we commonly call a “value-add offer”.  A price discount could also potentially be classed as a value-add, as it improves the value of the offer by reducing the expected cost, but it already has its own term “price discount”, so we will continue using the term “value-add” as referring to efforts to tip the utility side of the scale whilst the price stays constant. 

Why adjust utility and not price?

  1.  You don’t affect the affordability perception of your offer– what customers could afford previously, they can still afford as price hasn’t changed, so you are still effectively talking to customers in the same price bracket as before. 
  2.  Utility is subjective, so a benefit in utility cannot be objectively quantified.  Improving utility can have a bigger value effect for some buyers than others, where a change in price is immediately a standard value change for everyone, which brings us to the next, and most important point… 
  3. Others can easily replicate price but not utility.  Improving the utility side of the scale makes it more difficult for your competitor to copy or beat an offer.  In fact utility is often where your competitor advantage lies and can be improved upon.

How do we improve utility to improve value?

We mentioned utility is where your competitive advantage sits and this is true because your specific skills, advantages, and experience can be used to increase the utility of your offer to specific markets that value those characteristics.  By focusing on utility to drive value, you automatically differentiate yourself from competitors and the generic item, price, becomes less of a deciding factor in buyer choice.

Even though utility is a subjective concept, many utility factors can and do have a price implication, as the market price for such factors may be well known. However many utility factors don’t have a direct price correlation and in fact have different utility values for different markets.

There are so many categories and ways of improving utility to create better value , I’m not sure why businesses would resort to the one means of offering value that everyone can replicate and which comes with so many risks, which is price discounting.

Here are just a few value-added options off the top of my head that would drive utility up:

One utility value-add offer related to convenience that was pertinent during lockdown was home delivery.  Even though home delivery often has a perceived price value, offering free or reduced cost delivery tips the scales down on utility, as it just made it easier or even possible to access offers during lockdown.  Offering free delivery for a certain period does not affect the price perception of your core offer, but as many customers know the usual cost of delivery, they add that back to their value calculations.  When you return to charging normal rates for delivery, the value perception of your core offer is not altered, but the utility of the whole transaction experience returns to normal.

Closing thoughts…

I hope you have now realized the risks of discounting and seen that there are a whole range of other ways to increase the value perception of your offer, which provide further benefits without the risk or direct cost of discounting.

If you have any examples or stories to share about discounting or suggestions on more successful value-add options we can add to our list I’d love you to comment below so we can all see them!

Best Regards,

Peter Flemmer

5 Key Questions to reassess your marketing strategy during an Adverse Event like Covid-19.

when will you return signage

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Many businesses will need to do a full assessment of their marketing efforts in the case of an adverse event (for example Lockdown due to Covid-19, or extended power losses due to Loadshedding). In many cases how we do business can be changed forever, or a market we are positioned for can be changed or lost. Here are 5 key questions to answer in your business to start to determine a way forward and develop a continuity plan during, and after these kinds of events. Many of the questions will not have a complete yes or no answer and it may serve you to work out a % answer (e.g. I can do 60% of the work I normally do, or 40% of my staff may be able to do their work from home)

 1. How has this event affected how I can operate my business?

This question relates to the issue of your own internal operations, running as normal before the adverse event.

-Can I operate remotely, can my staff?

-Can I get necessary supplies? How are my suppliers businesses doing?

-Can I still deliver goods and services to my customers/clients?

-What work can I still do (what % of your normal costs/revenue is this)?

-What is the minimum level that I can operate on?

-What will “normal” working conditions be like after the adverse event? What additional or different requirements may be in place and how will this affect efficiency and costs?

2. How has this event affected how my customers/clients do business with mine?

-Can my clients still operate or to what extent can they still operate?

-What issues will they have running their own business?

-Would they still need/demand my current services during and post an event like Lockdown and to what extent may this have changed? What new dynamics within their business will we have to take into account?

3. Will my current target market/customer base still be able to fulfil my business needs during and post an event like Lockdown?

-What % of my normal business levels/targets will my current target customer base be able to fulfil? Is it sustainable?

-How long until I can regain the “business as usual” status with customers I had before the event, if ever?

-What key changes may need to be made in how I operate to adequately service these existing clients and how much will these cost? Will my business model still be profitable?

4. What new opportunities will be presented by the changes due to the adverse event?

-What permanent changes in behaviour and the way people do business, or even structurally and in legislation will be effected by the adverse event?

-How far reaching are these changes –local, national, regional, and internationally?  How do the changes manifest in different areas?

-What new needs/requirements are being created that I can take advantage of with:

           -my current offering

           -my business skill sets/experience

 -my business assets (equipment, people, processes, location, etc.)

 -my target market

5. What changes am I prepared to make to my business to survive and grow during and after an event like Lockdown?

Depending on your own situation, you may need or wish to engage in all three of the options below, they are not mutually exclusive, but will each require their own resources, so we recommend you determine exactly which share of your future business each option represents and apply resources appropriately.

Seek different or additional target markets with my current offerings? (only works if your current offerings would be in demand or if you can find new markets unaffected by an event like Lockdown)

Seek to service my existing target market with additional or adjusted offerings, related or unrelated to my existing offering. (and to what extent would this cover the shortfall in current business –remember if your customers can’t afford your offering during an event like lockdown, the chances that they can afford additional offerings are slim, unless the additional offer is a critical offer/item during an event like Lockdown). How will this affect my profitability? What changes and investment need to be made to introduce new offerings.

Seek to develop a new offering to a new target market (i.e. start a new business). What transferrable skills and advantages do we have that will be useful in a new opportunity presented by the adverse event? How quickly and easily can we access and break into a new market with a new offering?

Thank you! I apologize that there were slightly more than 5 questions here! We hope that going through the process of answering these questions has led you through some important considerations for your business and that you can start to see a way through and past this current, and future adverse events. If you would like to delve into this process in more depth, please don’t hesitate to set up a chat with me:

Kind Regards

Peter Flemmer

Some additional useful links:

https://www.livemint.com/news/india/the-business-plan-for-life-after-lockdown-11586791916823.html

https://robust-move.flywheelsites.com/wp-content/uploads/2020/03/The-Small-Business-COVID-19-Survival-Guide.pdf

https://www.entrepreneur.com/article/348184

https://rekordmoot.co.za/161599/tips-for-rebuilding-yourself-and-your-business-after-the-lockdown/

https://www.retailsuitemedia.co.za/post/practical-steps-during-and-after-the-covid-19-lockdown-for-business-recovery-and-growth

https://www.heraldmailmedia.com/news/local/owners-look-at-business-in-and-after-lockdown/article_7a58d549-0070-5088-9d7f-c542e65100c9.html

https://theconversation.com/what-will-the-world-be-like-after-coronavirus-four-possible-futures-134085