Discounting gets a bad rap, and it just isn’t fair. Critics consider it an act of desperation, a reflexive last-ditch tactic vendors try when buyers seem reticent. Discounting is a Sure Sign of Sales Failure, proclaims one recent headline. Others reflect similar disdain: Salespeople Who Give Discounts Are Not Salespeople. It’s easy to get cowed into believing that only a fool would attempt to multiply a list price by a factor less than one. Tell that to Theo Albrecht, co-founder of discount grocery retailer ALDI, who in 2010 was listed by Forbes as the 31st richest person in the world. Net worth: $16.7 billion. Maybe discounting can make you wealthy.
Vendors discount their selling prices for many reasons, and sweetening their appeal to buyers are among them. A possible indicator of failure, but discounting can also signal vitality, for example, when a company executes a high-growth strategy to grab market share in a nascent market.
In fact, discounting is hardly a mark of shame. It belongs in every marketer’s tool kit. Discounting is as essential for marketers as a portable saw is to a carpenter. Unfortunately, marketers often misuse discounting, which partly explains why the practice invites so many detractors. Like any tool, good results depend on two things: 1) using it for the right purpose, and 2) the skill with which it’s used. Heck, on YouTube you can find hundreds of videos of knuckleheads using portable power saws the wrong way, but it seems dumb to ban the tool.
Discounting offers many strategic and tactical benefits for sellers:
1. Exert time pressure on proposals and quotes. Discount offers can be effective when vendors put teeth into them by attaching contingencies. Discounting helps close the gap between buyer motivation and buyer action.
2. Adjust rapidly to changing market conditions. Sometimes, you just can’t stick with legacy pricing. Look at the decline of once-great companies—Sony, Blockbuster, Sun Microsystems, Sears, Motorola—and you’ll find ossified pricing in the rubble.
3. Facilitate customer acquisition in new markets. Discounting can facilitate equitable risk distribution between vendors and buyers.
4. Reduce obsolete products, or minimize inventory depreciation. When companies prepare to introduce next-generation products, it’s often advantageous to discount items that will become more difficult to sell in the near future.
5. Create perceptions of high value. Prospects and customers often anchor on list prices, and discounts represent a tangible value benefit. One B2B software company I worked for always presented small-to-medium business (SMB) pricing as discounted from the large-system list price. While the discounts varied, prospects anchored on the list price which the company charged its larger clients for the same software.
6. Pass savings to customers as conditions change. Commenting on the Chevy Volt, Don Johnson, GM’s US Vice President for Chevrolet Sales and Service said, “we have made great strides in reducing costs as we gain experience with electric vehicles and their components. We want to pass those cost savings back to consumers.” The same applies for companies that lower anticipate reduced support costs when clients have in-house expertise.
7. Reward loyal customers, invite membership, and incentivize larger-volume purchases. To create these outcomes, discount prices are often juxtaposed to list prices for marketing appeal.
8. Keep competitors off balance. As Nate Silver points out in his book, The Signal and the Noise, when competitors aren’t sure how you will play your hand, you have a powerful advantage. He used poker as an example, but the same holds for sales. Maintaining an option to discount can create difficult challenges for competitors.
In 2013, Charles Green commented on my article on this topic, writing, “Part of a pricing strategy is to offer a coherent statement of your value proposition, and of your approach to pricing with customers.” I agree. Many of the valid complaints cited by discounting critics support his point. When there’s no strategy for doing it, discounting does little more than corrode profits. “Since we can’t seem to close the deal, let’s just cut our price.” If that was the only reason executives provided for discounting, I’d consider joining the Never Discount chorus, too.
When discounting, here are some traps to avoid:
1. Overuse. Constant, indiscriminate discounting makes it meaningless to customers and salespeople.
2. Not assigning contingencies. Offering discounts without strings like expiration dates provides scant revenue benefits.
3. Showing desperation. For buyers deep into purchase process, discount offers often signal vendor desperation. The message: “the more you delay your purchase, the more we’ll reduce our price.”
4. Not explaining the reasons or purpose for the discount. Opacity is the enemy of trust. Customers should understand the reasons the discount was offered, including why they might – or might not – expect similar discounting in the future.
5. No alternatives. Some companies flat out haven’t figured out how to motivate buyers any other way. To buyers, that makes them look like a deer in headlights. If your company relies too heavily on discounting – consider different approaches, like keeping your list price, but adding low-cost services that appeal to customers. Or, reduce your prices, but only by reducing other services or features that they might later buy a-la-carte.
I’ve successfully used discounts in selling. I’ve taken some orders “off the street” when it was crucial for me to do so. I’ve used them to outmaneuver competitors. I’ve also lost more than a few opportunities at the last minute when I’ve failed to anticipate that the same thing could be done to me.
One thing I’ve learned: a sales executive hellbent on prohibiting or restricting price adjustments has denied himself a essential tool.