Discounting Is Dangerous

Wednesday, July 19, 2017

Marking down prices can give you an edge over the competition. That boost might not always translate into higher profits in the long run. It seems like discounting can boost revenues, even if it’s only temporary.

There are a few problems with markdowns that are typically overlooked.

Perception is Reality

Customers are vulnerable to price. If a customer is introduced to your product at 30% off, they will associate your product with that price. When the “sale” is over, you’ve more than likely lost that customer. This can be detrimental to businesses that thrive on repeat customers. Additionally, social circles of that customer will also have a “discount” in mind when they view your product.

The Inevitable Price Wars

Marking down a product is a declaration of war on your competition. Of course you should monitor your competitors’ prices, but you can’t compete solely on price. You have to find other ways to build a customer base. If you offer 20%, your competition might offer 30%. What will you do then? Can you afford to continually beat your competitors in the price war? This is another temporary boost to sales but it does impact revenues in the long term.

Cheap Champ

If you continue to promote yourself as the King of Clearance, the transient market will always see you as just that. You’ll be the discount leader, which will help you in a segment of the transient market. Most customers build loyalty. The transient market is only a portion of the market and the cheap champs are an even smaller fragment of that market. Pursuing that group can cost you some of your loyal customers.

Finding the right price point is important. Research shows that customers want to be loyal. What they look for is value. Fair price is essential to value.

A low price isn’t always a fair price. You have to consider what you might lose, besides a percentage of profit, before you start marking down your products.