Price discounts – Good or bad idea?

Sales promotion example - Percentage discount vouchers in store window

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Snapshot : As we’re now in the Christmas sales promotions and price discounts season, this week we discuss the conflicting sales and marketing view on pricing. We work through the basic finances of a price promotion, but also consider how important it is to understand the wider context. And we close with how price discounts fit into different brand positioning and competitive strategies. 

So, along with the tidal wave of Christmas advertising, some of which we covered in our article last week , the run-up from early November to Christmas also sees some of the biggest sales promotion periods of the year. Click Frenzy, Singles Day, Black Friday and Cyber Monday all come along in flurry of media coverage and hype.

As we cover in our guide to sales promotion, you have 3 main ways to drive short-term sales. 

Firstly, you can drive more visibility with displays and shelf-strips (in-store) or banners and flashes. (online) As we wandered round our local supermarket earlier, the various merchandising teams have clearly been hard at work. We were practically tripping over displays of Ferrero Rocher and Lindt chocolates. 

After visibility, you can support your sales team with information and education materials, giveaways and presentations. These are obviously less visible to the general public than well, the visibility items we mentioned above. But, you can guarantee that to get those displays and those banners in place, sales teams were in presenting to buyers four to six months ago.

But, what we really wanted to focus  on this week is price discounts. Because, let’s face it, as consumers, we all love a good bargain. We all get a nice little endorphin rush, when we think we’ve got something cheaper than it’s meant to be. But does the same apply, when it’s your brand, or your store that’s running the price discount? 

The sales view of price discounts versus the marketing view

Price discounts can be a divisive topic in businesses. People who work in sales or account management generally love them. When your target is to hit a sales number, temporarily lowering the price to shift more units just makes sense, doesn’t it? 

It’s nice and simple to explain. 

Everyone gets it.

In most categories, it’s expected you price discount at some point. 

You get to talk to the buyer about volume uplifts, and rates of sale. You get to talk about funding for the offer, and get other trading benefits out of the money you invest in the price discount. And importantly, it helps you hit that sales target that’s part of your performance objectives, and bonus pay-out. 

Boom! Brilliant!

We’ve been there. 

We get it. 

But, there’s a but. There’s always a but. Because, there’s an alternative way of looking at price discounts, that typically comes from the marketing team.

Because, every time you discount the price, you essentially hand money over to the consumer. You “pay” them something towards buying your product. You devalue the brand. The message you send out is that not enough people buy at the regular price. So you’re cutting the price to move product. And, when it goes back up to the regular price, won’t people stop buying, and wait for the next price discount to hit? 

So, who’s right and who’s wrong? Do you price discount, or not?

Well, there’s two ways to answer that questions, one led by finance and one led by brand positioning and competitive strategy. 

The finances of price discounts

Whenever you run a price discount sales promotion, it’s important to work out the numbers behind it. Review the business calculations that go into your Profit and Loss. This helps you see what impact price discounts actually have on your business. 

Let’s say for example, your sales team propose offering a 20% price discount next month, that will double the number of units sold. 

At face value, it sounds good, right? Double the number of sales has to be good, doesn’t it?

But, finance people would quickly tell you, you need more information than that to work out whether this is worth doing. 

Let’s look at two different scenarios to show why this could be a good, or a bad idea. 

Scenario 1 – Good idea

You sell 100 units a month. Each product sells at $100. You make $50 profit per unit. Total sales is 100 units x $100 = $10,000. Total profit is 100 units x $50 = $5,000. 

With this 20% price promotion, you now sell 200 units. Double sales, remember?

Each product sells at $80. You make $30 profit per unit. Total sales is $16,000. Total profits is 200 x $30 = $6,000.

In this scenario, both your total sales at +$6,000 and total profit at +$1,000 are better than a “normal” non-promotional month. 

Now let’s try the same scenario, but we’re going to change just one number. Let’s assume you only make $30 profit per unit, and not $50.

Scenario 2 – Bad idea

You sell 100 units a month. Each product sells at $100. You make $30 profit per unit. Total sales is 100 units x $100 = $10,000. Total profit is 100 units x $30 = $3,000. 

With this promotion, you now sell 200 units. Each product sells at $80. You make $10 profit per unit. Total sales is still $16,000. But total profit is now only 200 units x $10 = $2,000.

In this scenario, your total sales is up at +$6,000, but your total profit is -$1,000 versus if you had done nothing. 

So, in scenario 1 you’d do the promotion, and scenario 2, you wouldn’t do it, right? 

Well, mostly, yes. But this calculation is only a starting point. You need to think a bit harder. Because, depending on context, sometimes you would NOT do scenario 1. And sometimes, you WOULD still do scenario 2. 

The importance of context for price discounts

So, there are some further areas of context to consider, to decide if scenario 1 or 2 are good or bad ideas. 

Firstly, you have to consider the source of volume for those extra 100 sales that you get. 

If those units go to existing regular users, who just buy more at the lower price, you’ll find that the month after the promotion, those regular buyers don’t buy again. They’ve still got the units from the previous month. 

In the grocery business, this is often called “pantry fill”, so people buying two items at a discount, and then not buying again until they need to. This could result in a lot less sales and profit the next month, and an overall net loss, even under Scenario 1 above.

So, rewarding customers who’d have bought anyway, would make Scenario 1 less attractive. 

On the other hand, if those units go to new users or switch users from a competitor, those units are more incremental. You wouldn’t have got those sales any other way, and you use the sales promotion to drive trial of your product.

Once people buy a product, they are more likely to buy your product the next time. Not guaranteed, but more likely. 

So, this lag effect, might add to your pool of future ‘regular’ buyers who buy every month.  The value of these ‘acquired’ users might longer-term cover the temporary reduced profit you made in the month of the price discount.

So, bringing in new customers, would make Scenario 2 more attractive. 

So, two key learnings here. 

Firstly, it’s important to think about the impact of price discounts and sales promotion over the longer-term. Sure, they might have short-term benefits to pull in more users when they run. But, think about what happens longer-term. 

How does that change in sales impact future time periods, when you don’t run a price discount? When a shopper buys from you at a price discount, it’s not the same as when they pay full price. 

Which, then also bring us to consider whether the type of consumer who buys your product at the price discount is likely to stick around on the brand, once the price discount goes away.

In most categories, you will find a ‘price conscious’ segment who are not brand loyal. They don’t believe there’s much difference in brands. So, they always buy the one that seems the best value. You need to consider whether this segment suits your brand positioning.

The role of price discounts in your brand positioning

 

3 steps of the process - Segmentation - divide the total marketing, targeting - pick the most attractive, positioning - build your brand

Your brand positioning is usually summed up with a positioning statement that you pull together at the end of the segmentation, targeting and positioning process. It covers target audience, frame of reference and your point of difference, based on the key benefit, the reason why and the reason to believe. 

While every brand should aim to have a different positioning, academic studies of different positioning and strategies across multiple categories, has identified three generic approaches that can apply across categories and industries. 

These are known as Porter’s generic strategies after the academic Michael Porter who first proposed them. Knowing which area your brand fits into has a major bearing on whether you should include price discounts as part of your marketing and sales promotion plans. 

Cost Leadership

These types of brands aim for mass market appeal. They aim for scale, and use both their regular price and price discounts as a way to generate more sales. Their rationale is the more they sell, the more they spread their production costs and improve their overall margins

Brands and businesses whose aim is to compete on cost leadership should clearly consider price discounts within their marketing plans. They should run more sales promotions, more often. These brands are not overly concerned if they pull in price conscious shoppers who switch around based on price. 

Differentiation

These types of brands aim to identify one or more key product attributes where they can offer uniqueness or superior performance. The companies identify specific segments who value these attributes. And, they usually justify a price premium to more mainstream (cost leadership) type brands. 

These types of brands will usually do much less in the way of price discounts compared to cost leadership brands. They may need to do them occasionally to hit short-term sales targets. Or, to fit in with traditional or online retailers marketing activity. But, the price discounts will be less frequent and less deep. 

The aim with these types of brands is to build up a pool of loyal consumers based on the quality of the benefit or service. It makes less sense to do price discounts on these types of brands, unless something in the context of the brand demands it. 

Focus (Niche) brands 

The final positioning group is brands who offer unique or niche offers. 

In this case, there’s no scale. So, it doesn’t usually make sense to run price discounts. The people who buy these types of products will buy them anyway. They are not particularly sensitive to the price, since its the uniqueness or rareness of the products hat’s appealing. 

The only real exception to this would be where there is a need to drive trial by new users. So, these types of brands might run a price discount for new users only for example. But for regular customers, there’s no incentive or benefit to do so, unless they want to drive more loyalty or incentivise word of mouth. 

Should you use price discounts as part of your strategy?

Marketing purists would tend to tell you that price discounts are not a good thing. But sales pragmatists will tell you they are a necessary tool to shift products when you need to. 

For us, these views are at two ends of a spectrum. You adjust up and down that spectrum depending on the context of your category and business.

If you play in a category, where there’s already a lot of price promotion, and your product doesn’t have a significantly different feature, you may need to suck up more price promotions just to keep sales growing, There’s no shame in doing that, it’s a normal part of doing business. 

But obviously, if it’s your brand and your business, the idea of “giving away” profits to drive sales can be a tough one. In an ideal world, your brand positioning is so strong, that consumers will buy you at any price. We’ve worked on a few brands like this, who never offer price discounts. But, they are the exception rather than the rule. 

For us, it really comes back to your market research and your understanding of what drives choice in the market. If trial is important, price discounts can be a great way to drive it.

Think about “lock-in” products like razors and blades for example. The razors often come with heavy price discounts, so that those businesses then make the money back on the sales of the razors.

Look at streaming services like Netflix, and Spotify, they often offer big price discounts for new users, because they know that once people try them, they are unlikely to switch back out.

Price discounts – not always your choice

Of course, when you sell through traditional or online retailers, it’s not actually your decision on what the regular or price discount should be. In order to comply with government fair competition pricing laws, you can only set the (trade) price you sell to the retailer. And, you can then only recommend or advise on both regular price and price discounts. 

The exception to this is when you set up your own online store

Here, you are both maker and seller, and you can set regular price and price discounts to your heart’s content. Sophisticated marketing technology can even help you target price discounts to specific shoppers, say those that added to cart but then didn’t complete the purchase. 

Price discounts – if they were part of your Christmas dinner

Like Christmas dinner, price discounts have their place in your marketing plan. They’re probably not something you’d want all the time, but in the right context, they can be very effective. 

If your product is something similar to everyone else, price discounts can give you a competitive edge and a temporary point of difference. Think of them in this case like the gravy you pour on to your Christmas turkey. Price discounts add extra flavour to relatively “standard” products. 

But, if your product is more distinctive, then go more carefully with price discounts. Ask yourself, if the product is differentiated enough, wouldn’t shoppers buy it on that basis alone? Like an After Eight or a Ferrero Rocher, the price discount might help, but you know you’ll buy it eventually anyway. And the price discount mainly helps to switch you away from similar competitors. 

And, if your product is super niche, that only a few people would buy anyway, then there’s no point in price discounting. You won’t attract new customers and will only subsidise shoppers who would have bought anyway. 

Think of this example as like the Brussel Sprouts on your Christmas dinner. There will be some people who love them, and will eat them anyway. But for most people, it doesn’t matter what you do, they’ll just never be that into them. 

Check out our guide on the marketing plan, to see how price discounts fit in with the other parts of the marketing mix. Or contact us, if you need some help on a specific question with price discounts in your business. 

Photo Credit : Photo by Artem Beliaikin on Unsplash

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