by Asa Beavers
When business is slow, some companies will immediately resort to discounting prices to keep traffic flowing. This tactic may work for awhile, but it also carries some risks and pitfalls. For one, it can send a signal to your customers that your previous price was inflated. It can also train your customers to expect a discount every time they buy from your business, or have them put off purchasing from your business until you have a discount. And discounting will always cut into your profit margins.
Here's another way to look at it. If, for example, your present margin is 40%, and you reduce your price by 10%, you would need your sales volume to increase by 33% to maintain your current profit.
Don't get me wrong, a strong offer is a cornerstone of a good marketing campaign, but do you have to give away profit margin to drive sales? Not necessarily. A much better approach, before resorting to discounts, is the use of premiums. This allows you to maintain your regular pricing integrity, and offers extra value only if the customer acts within the prescribed time frame.
For example, a golf course, instead of dropping their rates to $25 like all the other courses in the area, kept their rates at $39 and gave away free golf balls. The upside to this strategy is that during this promotional period players got a box of 18 balls free every time they played. Since the boxes were brand name balls, the perceived value was about $25. The owner was able to buy them in quantity for about $7 a box. This kept his margin at $32, or $7 a round above his competition and gives his guests a wonderful bonus as well.
Another example is a publication soliciting annual subscriptions for $170. Instead of reducing the subscription rate to stimulate sales, they gave new subscribers a $50 dinner certificates to an upscale restaurant. The publication provided free ad space to the restaurant in exchange for the certificates, so the publication had no out-of-pocket marketing expense and maintained their price integrity. The restaurant gained exposure to a highly desirable target market, and the subscribers gained $50 of extra value. That's a win-win-win scenario.
There are two sides to marketing: acquisition costs and lifetime value. Acquistion cost is what the business spends to bring a customer into the business. Lifetime value is how much the customer will spend patronizing your business over time. Discounting to acquire customers attracts price shoppers and does not ensure they will come back again and again. Providing extra value not only maintains price integrity but it also makes the customer feel like they are getting more than what you are actually giving away. Chances are better they will come back again and again, and be willing to pay your non-discounted rate, meaning higher profits for the business.
Now think about your business. What premium offer can you make that costs less than its actual value, and provides perceived extra value for the customer? Sure, you may have to make a marketing investment to acquire the customer, but the extra value you give away and your exceptional customer service will keep them coming back again and again. Stop discounting and find other ways to attract and retain customers. The results will show up on your bottom line.
About the Author
Asa Beavers is a small business coach and consultant. He shares tips, techniques and strategies with smalll business owners to boost clarity and focus, create strategic action plans, and increase sales and profits. Visit his website at www.redlinebsg.com, email Asa at asa@redlinebsg.com, or call 919-367-0790.