How to discount in a downturn

Discounting is a great way to quickly stimulate sales, but it can have a terrible long-term impact on your brand. TAMI DOWER looks at the science behind discounting and finds the best strategies to help you boost you bottom line and keep your brand equity

By Tami Dower

Discounting is a great way to quickly stimulate sales, but it can have a terrible long-term impact on your brand. TAMI DOWER looks at the science behind discounting and finds the best strategies to help you boost you bottom line and keep your brand equity intact.

With the economic doom-o-meter hovering in the red zone, it can be tempting to resort to cutting prices in a bid to stay competitive. But is fighting fire with scissors really the way to get ahead when the economy falls behind?

On the one hand, discounting can be a great way to stimulate short-term sales growth and potentially attract new business. However, if you don’t get it right, you run the risk of setting up expectations of lower prices among your customers and ultimately slicing your profit margins – particularly if your competitors try to match your offers.

Needless to say, there’s no point slashing prices today if it means burning your bottom line tomorrow. So, how do you strike the delicate balance between short-term gain and minimising long-term pain?

Don’t drop your pants

Peter Huskins, director of marketing consultancy Shopportunity, says the trick is to understand customers’ needs in an economic downturn and play to them.

“You may have to discount a little, but you shouldn’t pimp yourself out to the lowest bidder just to get the business.”

Most importantly, avoid price promoting unless you can cut costs to preserve profit margins or survive on lower margins. “A significant uplift in sales is required to maintain margin dollars when discounting, and this sales uplift may not be readily achieved,” warns Steve Ogden-Barnes, program director of the Australian Centre for Retail Studies.

Whether a price promotion augments or undermines future brand preference will depend on the characteristics of what’s being promoted, says Devon DelVecchio, assistant professor of marketing at Miami University and lead author of a recent study into the effects of discounting on brand preference.

DelVecchio particularly advises luxury brands to be wary of lowering prices.

“Upscale brands need to carefully consider their brand image when discounting out of fear that they will be perceived less favourably,” he says.

Similarly, discounting may not be appropriate in a sector with few players and relatively low competition.

“The results of our study indicate that brand managers should be mindful of the size of the product category in which they compete, since the negative effect of price promotion is greater in categories with relatively few competitors,” adds DelVecchio.

Minimising the risk

Discount strategies come in many shapes and sizes, with varying degrees of risk attached. In considering which one to go for, it’s helpful to think about the options in three ways:

• Frequency – how long will your discount offer run for and will it be available once a month, once a week or twice a year?
• Depth – this refers to the value of the discount.
• Mechanics – this is about the way the customer receives the saving. For example, it may be a simple price reduction, or a “buy one, get one free” offer.

If you price promote too frequently, your consumers will become conditioned to expect discounted prices and will hold out for the next sale. (Anyone bought full-price underwear at Target lately?)

If you discount too deeply, you might get the sale, but you’re almost guaranteed to undermine the long-term value of your brand.

“The greater the depth of discount, the less frequently you should do it,” advises Shopportunity’s Huskins.

The most complex consideration, however, is mechanics. Here are some of the common options.

Dollar or percentage discounts

According to DelVecchio’s research, both dollar and percentage discounts are equally effective at inducing people to buy, but percentage discounting – for example 45% off a $20 t-shirt – is less likely to lead to future low-price expectations.

The reasoning is that consumers are less likely to remember a percentage discount than a dollar amount. Similarly, hard-to-calculate discounts like 23% or 48% are apparently less likely to drive down consumers’ price expectations than, say, 20% or 50% off deals.

Volume discounts

Another route that offers some margin protection, says DelVecchio, is multi-unit discounts, such as “five for $8” for an item that is usually $2 each. His research indicates that these multi-unit discounts often work better than the same discount offered for a single unit.

“In addition, the complexity of such offers may make them particularly effective for more shallow discounts. For instance, a baseline discount of 40 cents ($2 down to $1.60) may be perceived as small if consumers realise it is only a 20% discount. The multi-unit framing makes such a calculation more difficult.”

Bonus offers

Another option that is less price-focused than percentage or dollar discounts is the bonus offer, where a subsidiary item is given as a reward for purchasing the focal product (buy product X and we’ll throw in product Y valued at Z for free). This type of offer might also take the form of a larger volume of the product for the same price (for example, pay for two hours and get an extra hour free).

“Consumers tend to overestimate the value of such promotions,” says DelVecchio. “For instance, they tend to consider a ‘33% more free’ deal as the equivalent of a 33% discount, when in fact it might be the equivalent of a 25% discount.”

Should you tell the world about it?

If you’ve decided to discount, the next question is whether to shout it from the rooftops or surreptitiously slip the word out to a select few.

“Broadcasting a discount means that everyone expects the lower price,” says DelVecchio. “To the extent that there are customers who aren’t clamouring for a lower price otherwise, you are giving away money.”

Michael Valos, senior marketing lecturer at Deakin University, suggests that this problem can be overcome by using more direct communication channels, such as email or telemarketing.

“If you can reach people directly, offers can be quarantined to certain groups who are more price-sensitive. The main issue here is whether you need to use broad media to reach existing or new customers.”

David Jenkin, author of “What Great Retailers Do” says that if your competitors are discounting and you decide to join them, don’t be shy about it. “Tell the world but don’t do it so regularly that discounting becomes a pattern. Always put a time limit on it.”

In service industries, it pays to be more subtle. According to DelVecchio, price promotions by service providers are associated with more negative effects on brand preference than packaged goods.

Sandra Beanham, principal of marketing consultancy Sandra Beanham & Associates, believes service providers should always focus on developing and consolidating client relationships before lowering prices.

“In an economic slowdown, the principles of gaining new business for a service provider remain the same,” she says. “While competing service providers will be even more aggressive to retain their customers and attract new customers, price is only part of the equation.”

To cut or not to cut

Discounting may not be the way to go if you:

• Are not prepared to cut costs or accept lower margins.
• Are in the business of selling luxury goods.
• Operate in an industry with few major players and little competition.
• Are providing a service, not a product.
• Haven’t considered other options, such as developing client relationships.
• Promoting on quality.

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