As I perused the offering in the local Lidl recently (other discount supermarket brands are available) I was in awe of how they are able to remain competitive with quality products at such low margins. How different the days of Kwik Save that I regularly shopped as a student where the prices were similarly very low and the quality even lower.
Discounting can be a tempting strategy to boost sales and get a particular product moving, but without the economies of scale and resources available to the big operators, such as Lidl, Poundland and ASDA, it is fraught with danger for the small business. A special mention should be made of Ryanair and EasyJet who have taken the "no frills" approach to another level, but you'll notice they claw much of this back with hefty upsells on their discounted fares.
So why you should avoid discounting;
1. Discount brings in the lower price customer. If you normally sell a product for £10 and decide you want to get rid of some stock and give 50% discount. You bring in customers who now see the value of your product as £5. The price customers are rarely ones that you would look for, they are more likely to complain and the price will still be too great. If you provide consultancy or coaching these are the ones less likely to value and therefore follow your advice and blame you when it goes wrong.
2. It's also costly in the numbers you have to sell to make the same profit. Unless you can squeeze a price cut from your suppliers your costs remain the same so all the discount is from profit. If your profit margin is 30% and give a 20% discount you would need to double your sales just to break even. It demolishes the argument that more sales will easily make up for the discount.
3. It changes the positioning of the company. To position yourself as an authority and expert in the eyes of your perspective clients is hugely powerful marketing strategy that means customers are prequalified to buy from you and regard you as the go to company in the field. This belief would be severely shaken if the go to company was discounting, shifting position to the cut price end of the market.
4. It feeds the scarcity mentality within you and the rest of the company. In the cases of those large companies mentioned they have economies of scale but also have a brutal attitude to cost cutting within the supply chain. You, and all associated with the company will have to adopt this mindset and, frequently, the first casualty is customer service and satisfaction.
5. You could start a price war. If you cut prices so will some of your competitors. Within a few weeks, possible a few days after the discount you no longer have the price advantage and you are back where you started but earning less money. You decide to discount further! Now it's a battle of wills. The company with the more robust resources surviving, but often severly damaged by the experience.
Is it always wrong to discount, no! If you are doing so in the short term to launch a new product or service. Or getting rid of over stock. Or as a method for generating leads. All acceptable as long as you are aware of the cost and it fits with your long term strategy. But, as an overall strategy, it could prove lethal!
This is one of the many tools used in LEFf Business Development which you can sign up for here.