When is it okay to discount my product?
Discounting is a tricky subject. Personally I have a love/hate relationship with the topic as one size does not fit all businesses.
My general advice to founders is to avoid discounting as much as possible. That said, discounting used strategically can be an effective and legitimate way to improve your top line.
It’s a balancing act to make discounting work in your business, and there are two key reasons you may choose to offer discounts. They are:
- To move old or slow moving stock
- To (cautiously) acquire new customers in certain scenarios
Let’s dive deeper into how and why these two reasons to discount might – or might not – suit your business.
In this article:
- Discounting to sell old or slow moving stock
- Discounting as a customer acquisition tool
- Discounting sets a price anchor
Discounting to sell old or slow moving stock
You might have a warehouse filled with older or slower moving stock. These products might be sitting there gathering dust because a newer, shinier version has been launched into the market.
A lot of founders I work with are hesitant to write-off or massively discount old stock because they’re anchored to the idea that it’s still worth something in the market.
It’s often left to the ‘too hard basket’ because they are focused on selling and promoting the newer, sexier stuff.
The reality is your old stock is costing your business. This bloated inventory balance is taking up valuable warehouse space. As it sits collecting a thicker layer of dust it also starts to devalue each and every day.
But most importantly – obsolete stock is sucking up your cash flow.
This is when discounting can be used as an effective and strategic tactic to clear old products in order to make room for new inventory.
To get this old stock moving, you will likely need to sell these products at a lower margin, or even at cost. Consider it a sunk cost to your business.
Discounting as a customer acquisition tool
Even more popular than discounting to move stock is discounting to acquire new customers. Let’s look at why you should approach this reason with caution.
Marketers love to use discounting as a tactic to attract new customers. Just scroll through any social media platform or website and you’ll see sales campaigns, especially around Christmas, Black Friday, Cyber Monday and EOFY… any excuse, really!
The common thinking for marketers is that discounting is a brilliant tactic to get a new customer through your door. With the first sale you may make a small profit, or even a loss to acquire that customer now, but the hope is that this newly acquired customer will pay off over their lifetime.
It’s big to assume that a new customer will become a repeat customer, and a full-price-paying one at that. But that’s what many marketers do. Why do brands use this tactic? And are we sure it works?
The short answer is they use it for a fast win and they’re not sure it works.
The long answer is that the tactic of acquiring a new customer is great, but after that, brands need to track and monitor customers through a cohort analysis to see if this cost pays off in the long term.
While discounting is a valid customer acquisition tactic, most marketing managers rarely put in the hard work to measure how effective a discounting campaign was.
They should be asking themselves these questions before designing a discounting campaign:
- What discounting budget should we set to attract this new customer?
- Is this the type of customer we want to attract?
- What is the payback period of this new customer?
Don’t just assume you can get that customer to pay full price in the future. As an accountant, I challenge you to really think before you discount.
Discounting sets a price anchor
The main risk of attracting new customers via discounting is that it sets a ‘low’ price anchor at the beginning of a new relationship. Once the bar is set, it can be challenging to reset your customer’s expectations back to full price.
Your customers have anchored themselves to the discounted price – and anything above that is perceived as ‘expensive’ in their eyes. If the customer received even 10 per cent off once, they will expect 10 per cent off again and again.
Discounting also sets a dangerous precedent as the customer becomes trained to only buy your product when it’s on sale. If you’re tired of riding the wave of cyclical sales with your business, leaning into a discounting strategy will only make things worse.
If customers are waiting for the sales period, you’ll quickly see a vicious cycle of artificial sales boosts thanks to discounting.
From a topline perspective, sure, it’s great to see you’re maintaining revenue. But from a financial perspective, you are most likely losing money.
Ultimately, discounting to attract unprofitable customers is like buying friends to make you happy. And nobody wants that.
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