Whether you’ve just set up shop and it’s time to determine your pricing structure, or you’re thinking it’s time for some price point revamping, pricing products and services can be tricky business. There are various reasons you might be considering discount pricing, but is it the right move?
Products vs. Services
When you’re talking discounts, the success of a sale or discounted offer can depend heavily on the type of business you’re in. Jacob Holton, a behavioral economist and founder of EfficientHuman.com, says discount pricing is rarely a viable strategy for service-based businesses, because services aren’t scalable in the same way that products are. “With physical products, the perceived quality of the product depends on a lot of factors besides price. With the right marketing, packaging and overall presentation, competing on price can drive volume and create a fantastic advantage,” Holton says.
Services are often perceived to hold more value at higher price points. Clients tend to believe that consultants charging premium fees are in higher demand and more skilled, assuming that demand for a top-quality service allows that person to command those fees.
Digital products, while technically not a service, follow this same philosophy. Holton explains, “With digital or information products, higher prices almost always translates to consumers thinking the product is a higher quality, within certain thresholds. For example, a $97 product seems better than a $67 product. But a similar product that costs $137 will sell way fewer units than the $97 product.”
Discount Pricing Pros
A discount pricing strategy can produce great results if used under the right circumstances. For instance, if demand can be enhanced by discounting surplus inventory of a product, the business can quickly move it out to make room for a different or newer item.
Coupon codes can be more effective than simply running a sale, because consumers feel like they’re getting an advantage over other shoppers. “They feel like an insider, knowing that other visitors to the site without a coupon code would pay a higher price,” explains Julie Vlahon, PR evangelist for TechBargains.
“Merchants don't want to discount their products and services because it reduces their profits. That being said, the reality is the vast majority of consumers expect some discounting given the recession and the Amazon and Wal-Mart effect,” Vlahon says.
J.C. Penney Lessons Learned
The department store J.C. Penney learned a harsh lesson earlier this year when they eliminated sales and promotions entirely, instead opting for an "everyday low prices" philosophy. The campaign, “Fair and Square Pricing,” was built on the mistaken premise that customers want low prices every day instead of being enticed by sales or required to bring coupons for discounts. A 20 percent drop in first quarter sales made it abundantly clear that they were wrong.
Michelle Clark, an analyst for Morgan Stanley, conducted a survey to gauge consumer response to J.C. Penney’s re-branding campaign. Consumers actually reported seeing higher prices at the department store after the change, contrary to the company’s claim. In fact, only 16 percent of the shoppers surveyed said they found the best prices at J.C. Penney, and many say the campaign's messaging is confusing.
When Discounts Fail
Even if you’re in a product-based business, discount pricing isn’t a surefire strategy in every situation. “It is not recommended as a long-term strategy as it only serves to cannibalize sales that would otherwise have been made at full price,” says Lori Karpman, president and CEO of Lori Karpman & Associates.
Long-term discounting can also reduce consumer perception of the value of the retailer, which is perfectly acceptable if you’re shooting for being branded as a discounter (think Dollar Tree and T.J. Maxx). If you find yourself running frequent sales merely because you’re not moving products quickly enough, you may give consumers the impression that your products lack in quality or that other consumers are choosing not to shop with you for some reason, such as poor customer service.
The biggest problem with discounting is that it cuts into your bottom line. If you’re dealing with products that have a lot of markup, you have the leeway to drop prices if you need to move products quickly. But products with minimal markup can eat profits and even drop into the red thanks to overhead costs.
Whether or not to use a discount pricing strategy is a decision that must be balanced based on the potential outcomes of each individual circumstance. If you can discount without reducing consumer perception or if you need to move some older products to make room for newer, higher-priced items, it makes sense.
If you can discount while still conveying the value of the product or service, such as using coupon codes, you can maintain value perception. At the end of the day, consumers love to feel like they’re getting the best deal on the best products and services, so work your discounting strategy to meet those demands. Finally, always be sure to provide clear messaging and details on discounts; otherwise, your customers may feel as though you're trying to dupe them.
Read more about how to offer sales.
Angela Stringfellow is a PR and MarComm Consultant and Social Media Strategist offering full-circle marketing solutions to businesses. Angela blogs via Contently.com.