Discounting pros and cons

When cash is tight, discounting can be a tempting quick fix. Lower prices mean increased sales and more cash — right?

Yes.

stack of currencyBut like most quick fixes, there is a downside. The danger comes when discounting becomes a long-term strategy rather than a short-term tactic. Here are some pros and cons of using discounting to create better cash flow.

  1. Customer loyalty.
    Everyone loves a deal. So you’d think your regular customers would be thrilled to receive a discount. And they probably will, at first. But think about what attracted your best customer to begin with; it was probably much more than price. Factors like product variety, personal service or a reputation for on-time delivery are what keep customers coming back. If they see you lowering prices too often, they may assume you’ve lowered your standards or that your business is on the ropes. A steady stream of discounts will thus cheapen your brand and may actually drive away your best customers. Discounting also attracts price shoppers, an entirely different and fickle audience. They’ll only be with you as long as you have the lowest price.
  2. Selectivity.
    If negotiating is the usual method of doing business in your industry, that doesn’t automatically mean you have to discount. You can avoid discounting by promoting the real value of your product or service, including excellent customer service, a wide product line, accuracy and an on-time delivery record. And if you discount for one customer, you’ll likely have to discount for other customers and prospective customers and end up trapped selling at a lower price permanently. That’s even worse news for your cash flow. To avoid being stuck in permanent discount mode, stipulate that you’re offering a one-time only discount or a first-time customer discount. If your customers are segmented into different markets or industries, it’s easier to offer a discount to one group without having to offer it to everyone.
  3. Timing.
    Discounting is a good way to clear out seasonal merchandise, and customers have come to expect after-holiday and end-of-season bargains. It’s also a way to get rid of products that aren’t selling well or can’t be returned, and it’s more cost-effective than paying to store items that may or may not sell later. Discounting can be your friend in these situations. Offering a discount to customers who pay bills immediately is also a good way to increase your cash flow without cheapening your brand. Customers save and you have more cash. There are some businesses where discounting is the norm. For example, if your sales are conducted in an auction, price cuts are expected. Discounting can also attract new customers who haven’t used your product or service before. The downside is you can’t predict how much of the business will return, and you may offend long-time customers who see newcomers getting a better deal.
  4. Customers, sales staff, competitors.
    How do your customers, employees and competitors react to discounting? It’s helpful to consider these perspectives.

    • Customers. If some customers always expect a discount, are they the type of customers you really want? Avoid clients who consistently want to nickel-and-dime you into a lower rate and promise to pay your regular rate next time. It may not happen, and in the meantime, your profitability takes a hit.
    • Salespeople. Sometimes your salespeople can be quick to offer a discount, thinking it’s the best way to close a sale. But they may be underestimating a customer who feels they’re already getting a fair price. If a customer or prospective customer can’t pay your price or doesn’t want to, again, is this the type of customer you want?
    • Competitors. If your competitors get wind that you’re offering discounts — and you know they will — they may follow suit and soon you’ll have a price war. That could mean a downward profit spiral until one of you is out of business. Some of your customers may tell you the competition offered them a lower price. Let them take it. They may be saying the same thing about you.
  5. Think long-term.
    Don’t waste time on clients who will never value what you do. Instead, devote more time to cultivating clients willing to pay what your product or service is worth. They are the ones that will refer you to other good customers. It may seem counterintuitive, but rather than discounting, think about raising your prices or rates. Valued employees get raises; as you gain experience and your reputation grows, it only makes sense to raise prices.
  6. Think tactics, not strategy.
    A major department store’s recent experience is a cautionary tale of what happens when discounts take over. The chain offered a steady stream of discounts, coupons and sales to compete with other big-box stores. A new CEO announced a policy of across-the-board, everyday savings without coupons or constant sales — but discounting was so ingrained in customers they didn’t buy this new approach and profits suffered. The department store eventually retreated and was, at this writing, back into the discounting game. First, the CEO’s pay was cut 97 percent — then he was fired. There’s no guarantee that this store, with strong Missouri roots, will survive.

Rather than discounting, it may be better to concentrate on the value you offer your customers. That way you’ll grow your business without selling yourself short.

For help with finance, pricing, business ideas, marketing, management or growing your business, visit your local Small Business & Technology Development Center.

- Contributed by Kelly Burkart through a partnership with US Bank.