Ask any marketing educator or consultant his/her pet peeve and you might find this is it: They dedicate careers to studying science of marketing and their advice to students/clients is ignored. This phenomenon is especially prevalent when it comes to the topic of price discounting.
Marketing practitioners — especially those in retail — often like discounting because they see a cause and effect. Drop the price of widgets from $200 to $100 and watch them fly. When sales volume is slow, discounting gets people into a store or showroom. This is just common sense, so who needs an egghead academic saying it will harm their brands and make marketing more difficult in the long-run? Many marketers don’t want to hear discounting is dangerous because they either don’t believe it or don’t want to believe it.
Well, the egghead academics are correct. Here is what inevitably happens. Companies generally cannot make a sustainable profit deducting 30-70% off a legitimate price. So what do they do? They raise the price and offer a deep discount on that inflated price. They are enticing some customers to buy while making it harder for the company to earn a profit. You don’t have a profit when you give it away via discounting. When companies start marking up only to mark-down it’s a sure sign of impending doom.
There is a place for discounting in the marketing mix, of course. Discounting is an effective way of liquidating excess inventory; introducing a new product; and capturing consumer attention. It can also be used strategically to squeeze competitor price-points and margins. Nobody who teaches the science of marketing will tell you there isn’t a place for discounting. What they’ll tell you is this: Don’t over use this tactic. Doing so may potentially destroy your brand and your company.
Discounting is the marketing equivalent of a 3pm cup-of-coffee. The caffeine boost gets you through the day, but doesn’t address the core issue of why you don’t have enough energy. Where we see too much discounting we often see a culture short on innovation and entrepreneurial thinking. We also see a need for more business education. The more marketers understand about marketing science the less dependent they become on discounting.
For example, study-after-study proves that price is not the biggest factor in the consumer purchase decision process. It’s not even near the top. Perceived value is the biggest factor. The mistake in practice is assuming a lower price increases perceived value. It often does not. If you see a sofa discounted from $899 to $599, for example, do you really think that sofa is worth $899? Is that jacket marked-down from $379 to $165 really worth $379?
If price had this biggest effect on your purchase decision wouldn’t your home and office be filled with the lowest-prices alternatives for everything? Why didn’t you buy the cheapest tires for your car? Why not buy the lowest priced linens for your bed, or the lowest-priced food for your children? Why did you have lunch at Panera and not brown-bag it? It’s because perceived value, not price alone, is what’s driving you.
Marketing is a science, which means actions have predictable results. Discounting is a dimension of marketing science, therefore there are predicable results. If your company is relying too heavily on discounting to generate sales you need to solve the underlying problems. Look at your value proposition, advertising and pricing. If consumers will not buy a product unless it’s discounted, your price is either too high or you haven’t convinced them otherwise. Marking-up prices only to mark them down is a bad strategy. Chickens come home to roost. Take a free tip from one of those eggheads who studies this stuff for a living: You cannot trick the market in the short-term and expect to thrive in the long-term.
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