Pricing is a strategic tool that reinforces a brand image and can drive or defend market share. Stop and read that again because that is a powerful statement. Business owners today are SALES and DISCOUNT HAPPY! What does frequent sales say about your brand’s image? Exactly. That’s why business owners should have an uneasy relationship with discounts. The downside of sales and discounts is they can destroy price integrity with blinding speed. I get the other side of the argument because sales and discounts can bring a stampede of buyers through the door faster than just about anything else. Truth is, sales and discounts can both be a destructive force and an effective way to drive sales. The main problem is that most business owners use discounts too casually and thoughtlessly because they do not fully understand the negative effects.
Is price your only competitive advantage? I sure as hell hope it isn’t! When you offer a discount, you are taking the focus from the value you provide and placing it squarely on your price. But I get it, that is hard, right? To maintain higher prices, you have to instead be adept at selling value. That means you have to actually know your value proposition. There is no way to escape that. According to the management consulting firm McKinsey & Co., between 80% and 90% of incorrect pricing decisions are made by charging too little for products. That’s a stunning fact. Not only could these brands make a better margin but they would also likely have a stronger brand equity. If your quality is good and your targeting and positioning are right, have confidence in the price you have set and do not consider dropping it. Too many sales managers and marketers contradict their brand’s positioning either by launching at too low a price or dropping that price too easily at the first sign of trouble.
Remember when I said this a few articles ago?
“You want to know who created all those brand issues? It was YOU! Remember all of these?
- Years of “Me too” product development
- Aggressive pricing to get “new business” when sales or cash was tight
- Over forecasting that leaves you with tons of inventory that leads to liquidations
- All those discounts you give your distributor to push your products
- Volume discounting to your biggest accounts
What I am here to tell you is that Amazon is not the problem. If brands were being honest with themselves, they would say they hate Amazon because they are transparent. Amazon didn’t cause these brand issues, they exposed them. So stop blaming them and start getting back to work to clean up your brand.”
Furthermore, studies show that discounts actually reduce the effectiveness of the product in the buyer’s mind. The discounted product literally does not perform as well as it did at full price. That sounds impossible, right? Double-blind studies, in the sports nutrition CPG industry, have shown this to be true.
This is why it’s imperative that you always give a good reason for a discount. Unless you plan to compete on price continuously, you can’t have predictable sales and discounts. If there’s a sale, it must be for a specific reason with specific rules…
Just to explain the other side of the coin, there are upsides to offering discounts. They can be a great way to modify a customer’s behavior. Volume discounts are an example of this and underutilized in my opinion in the fitness and sports nutrition CPG industry. Simply put, volume discounts make sense in the buyer’s mind. We are trained to expect that the more we buy, the cheaper things will get.
Other good reasons to discount include:
- Prepay discounts. Prepay will help to keep your accounts receivable current.
- Bundled deals. These discounts can help you increase your transaction size.
- Seasonal sales. Businesses with seasonal slumps can disclose that as reason for discounts at a specific time of year with few negative ramifications.
A good reason for a discount can mitigate damage to overall price integrity and brand equity. As for you aggressive discounters, how about you have one product that’s designed to be the one thing you use to drive traffic, whether periodically or perpetually. This way, you isolate the damage discounting will do to your price integrity. You can then, if you wish, preserve full, fixed pricing for all other products.
Interested in hearing more about pricing, sales, and discounts? Drop us a comment!