Discounting destroys value

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I’ve been a pretty loyal customer of JoS. A. Bank (the clothier) for the past twenty years or so. I started buying shirts there when I was still in the Marine Corps and then stepped up my purchases when I was in graduate school at Penn – shirts, suits, ties, etc. The suit I wore my very first day at Goldman Sachs in 1988 came from JoS. A Bank and over the years, I estimate I’ve purchased at least a two dozen suits from the store – I figure that probably puts me in the ‘loyal customer’ category.

Because of this, I’m on their mailing list for specials and sales…and let me tell you, they’re working overtime when it comes to sales and discounting. Almost every week, the clothier advertises a new sale. And I’m not talking your typical 10-20% off sale for selected suits or shirts…no, they’re almost giving their product away. Here’s just an example of what came this week.

“BUY ANY SUIT at regular price and GET A 2ND SUIT FREE! Plus GET A SPORTCOAT OR BLAZER FREE!”

Great deal, right? Well, not really. Discounting like this destroys value. While it may draw new customers to the store, it changes the perception that loyal customers like myself have towards the product line. After years of paying close to full price for suits and shirts, I’ve now been conditioned to wait for sales and heavy discounting before I purchase anything more. For JoS. A. Bank, it will be a challenge going forward to convert loyal customers like me back to paying anything close to the full, listed price.

Authors Reed K. Holden and Mark R. Burton (Pricing with Confidence) say it best when talking about discounting: “There is nothing wrong with discounting. Sometimes it’s the right response. It’s the habit of discounting…that’s so destructive. It’s the addiction to discounting that we’re against. The difficulty with discounting is, as with all addictions, is that it is very difficult to stop. People get used to discounting.”

Here’s the takeaway. Frequent discounting destroys value. And when you destroy value, you destroy the relationships that have been built up over years with your loyal customers.

Republished with author's permission from original post.

Patrick Lefler
Patrick Lefler is the founder of The Spruance Group -- a management consultancy that helps growing companies grow faster by providing unique value at the product level: specifically product marketing, pricing, and innovation. He is a former Marine Corps officer; a graduate of both Annapolis and The Wharton School, and has over twenty years of industry expertise.

2 COMMENTS

  1. Patrick: I had immediately formulated an idea when I read the title of your blog (my bad!). What I was going to say is that in B2B sales, value has already been destroyed by the time the discount is offered. When a vendor connects a solution with issues that are at the center of a prospect’s target, there is no need to discount. It’s when customers “don’t see the value,” that the waffling begins, along with the knee-jerk sales reaction “what if we discounted our proposal? Would you buy from me right now?” In many cases, discounting covers for sloppy sales and marketing.

    But not always. It’s sometimes a powerful selling tactic. But when it’s over used, as you point out, it becomes meaningless in the prospect’s eyes. One thing I’ve learned, the termination date of a discount offer means exactly that. No extensions. No exceptions. Once a salesperson deviates, he or she has undermined trust. The costs are greater than the discounted revenue given up. The vendor has just made every subsequent proposal “subject to negotiation.”

  2. There’s a really interesting story that comes from the Stanford Entrepreneurship Center where Christine Benninger, president of the Humane Society Silicon Valley, talks about how she leveraged the axiom “you get what you pay for” to successfully solve a major problem with regards to the chapter’s unacceptable return rates of previously adopted dogs and cats.

    For many years, the Humane Society had charged an adoption rate of $25 for cats and $40 for dogs. At those relatively low prices, the adoption business was brisk, but the problem of cats and dogs being returned to the shelter was overwhelming the staff and facilities. At the same time, the California Veterinary Medical Association conducted a study that looked at what types of animals get returned to shelters, and an offshoot to this study also looked at the relationship between the rates of return for animals and the price that had been paid for them. This part of the study showed that there was a very strong correlation between the amount paid for the animal and the likelihood that the animal would someday be returned to the shelter: the lower the adoption price, the higher the likelihood that the animal would be returned.

    Armed with the data from the study, Benninger went to her board to propose significant price hikes. She wanted to raise the adoption price for both cats and dogs to $110—an increase of over 400 percent for cats and almost 300 percent for dogs. Naturally, Benninger’s staff and the board pushed back on the proposed price increases, citing the opinion that while the price hike might make a dent in the return rates, it would significantly affect their adoption rates. The staff’s resistance to the hike could be summed up quite succinctly with one question: “Who’s going to pay $110 for a six year-old dog?”

    Despite the resistance, the board approved the price hikes. Guess what happened? During the first year, adoptions actually increased 10 percent and more importantly, their rate of return was cut by 50 percent. The response was exactly as Benninger had predicted: As the perceived value of the adopted animals increased, so too did the reluctance of their owners to return the pets to the shelter. In the years that followed, the Humane Society Silicon Valley continues to use price with great success as a major tool in instilling the perception of value among their customer base.

    Today, 99 percent of the animals available for adoption find new homes; ten years ago, less than 15 percent found new homes. Under Benninger’s leadership, the Humane Society’s volunteer base increased from fifty to more than 700, and the shelter’s donor base increased from 300 to 30,000 donors.

    Enjoy…and thanks for taking the time to read and comment.

    Pat

    Patrick Lefler
    The Spruance Group
    Site: http://www.spruancegroup.com
    Blog: http://www.spruancegroup.com/blog
    Newsletter: http://www.spruancequarterly.com

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