Is Your Business Heading for Death by Discount Code?

Groupon_70_Percent_OffEverybody loves a discount. I’m about to become a homeowner for the first time, and most of the things I bought were massively discounted. I got a sofa and armchair from Debenhams which were both reduced by around 70%, and a mattress off Groupon.

For consumers, discounts are brilliant. But for a business, knowing when and when not to discount is crucial to being successful. Used in the wrong way, it can destroy a business.

Discounting can be likened to a death by 1,000 cuts for businesses who rely on them heavily to generate sales.

Why Discounting Can Be Dangerous

072212 gatelys-126Offering a huge discount destroys a company’s profitability. There is no shortage of articles online about how Goupon discounts can be dangerous for a business. Unless you have a ridiculously big margin, you’re going to make a loss. Some companies accept this because they count on repeat customer, but the steep discount has created an extremely low price reference point for consumers. By price reference point, I mean the price consumers expect to pay for an item. Consumers will remember what they paid when they got the deal, and are less likely to buy again because the normal price is much higher than what they paid before.

Huge discounts create expectations which can be fulfilled on a continuous basis. It may acquire a customer, but it arguably makes it even harder to retain them.

Marketers also need to consider the impact of big discounts on existing customers, or customers who would otherwise be happy to pay the full price. A lot of people won’t be best pleased if they discover that someone has just saved 70% when they’ve been shopping at a site for years and never got that kind of deal.

I’ll shut up now, but here are a couple of good articles which go into more detail:

What about smaller discounts like 10% or 20%? Are they OK?

Even small discounts can be dangerous to a business. Lets say you regularly receive an email from Amazon once a month, offering you 10% of your next order (I wish!). What would you do? I’m guessing you’d almost always wait for the discount to land in your inbox before buying. There are some companies which do this – and it changes buyer behaviour. people who would otherwise pay the full price wait because they know a discount will arrive. I’ve seen companies whose social media profiles have a load of comments from customers asking ‘what’s the discount code for this month?’. This essentially encourages price sensitivity and profit margin erosion.

But don’t worry – there’s still time to turn things around!

Discount Codes Aren’t All Bad…

Yoda_Be_WiseUsed wisely, discounting can help a business achieve its objectives sustainably. To use them effectively, marketers need to map out their business objectives and consider the situations where a discount could be useful. Here’s a few ideas:

  • Apologising to a customer. If you’ve messed up, offering a discount may be a good way to apologise to someone who may not otherwise buy from you again.
  • Re-activating a customer. If a customer is no longer buying from you, a discount may be a good nudge, but try non-discounting methods first.
  • Clearing excess stock. Got too much stock? This is perhaps one of the few situations where I think a big discount is acceptable, as you need to shift the goods somehow.
  • Incentivising customer actions to achieve a business goal. A discount can be used as part of a member get member scheme. Offer customers a discount on their next order if their friend placed an order.

Sustainable Discounting for Effective Marketing

Discount codes aren’t inherently bad – they’re just commonly misused so that they provide no long term benefit to an organisation. For effective marketing, don’t make the discount code the first tool you use to generate sales. Look to improve marketing performance in other ways, and research to find out why your not performing as well as you want to be.

If you do use a discount, carefully consider how it fits in with your marketing objectives, how big a discount you can afford to give, and what the long-term consequences might be. Doing one-off discounts won’t cause long-term harm, but it may kill a business if regularly used in ways that don’t benefit the business.