Discount Sales

Related Terms: Rebates

Discounts are reductions of the regular price of a product or service in order to obtain or increase sales. These discounts—also commonly referred to as "sales" or markdowns—are utilized in a wide range of industries by both retailers and manufacturers. The merits of discount pricing, however, have been a subject of considerable debate over the past several years as analysts argue about their effects on short-term sales, longer term profits, brand loyalty, and total supply chain costs for retailers and manufacturers.

RETAILER AND MANUFACTURER VIEWS OF DISCOUNTING

Discounts are a staple of business strategy for many retail firms. As Tom Hartley noted in Business First of Buffalo, sales remain "the fuel that drives the retail engine." He cited the views of several retail experts who flatly insist that sales promotions are integral to most retailers' success. "The name of the game is promotion," one expert told Hartley. "Sales are the only way to drive the business and retailers have to have them, even if they seem to be going on all the time. Discounting in America has been built into the retail cycle. It is no longer a big deal."

But small retail firms should make sure that they go about the discounting process in an intelligent fashion. Business consultants cite several considerations that small retailers should weigh when putting together their overall marketing strategy. For example, retailers should beware of overuse. Indeed, according to many economists and business owners, discount periods increase sales volume but also deepen sales troughs between sales. Other analysts contend that frequent sales tend to numb customer response over time; Hartley pointed out that "many retail experts think consumer have become less trustful of retailers who[m] they see running weekly sales, or marking up items so high that they make a profit even after slashing prices 20, 30, or 50 percent."

In addition, retailers should study historic customer response, inventory levels, competitor pricing, seasonal cycles, and other factors in determining the level of discount. Some businesses are able dramatically to increase sales volume through discounts of 20 percent or less, which in many instances enables them to maintain a decent profit margin on sales. Other businesses may have to offer discounts of 40-50 percent (because of seasonal considerations, industry trends, etc.) in order to see meaningful increases in traffic. Of course, some retailers employ a price philosophy that emphasizes every-day low prices in the hopes that the increased volume will make up for the small profit margin achieved on individual sales.

Manufacturers, meanwhile, should be very careful in establishing discounts for their goods. Recent studies have indicated that price promotions offered by manufacturers often set a dangerous precedent; they condition customers to make purchases based on price rather than brand loyalty. "Over the long term," claimed Management Today contributor Alan Mitchell, "[discount pricing initiatives] do precious little to improve base-line sales, increase the incidence of repeat buying or attract new customers. They do, however, undermine other marketing initiatives by sensitizing consumers to price." A top manufacturing executive agreed with this analysis, noting that "[manufacturers] are actually training consumers to hunt around, to look for high-value offers. We're either encouraging them to shop up heavily when the offer appears and distort the supply chain, or we're really annoying them if they miss the offer because it's just stopped. Net, we're undermining their loyalty." Finally, ill-considered discount sales can lead to price wars with other competitors and can tarnish the image of the brand in question.

There are other drawbacks often associated with discount sales as well, and these can quickly get an unsuspecting small business owner in serious trouble. Sales & Marketing Management contributor Minda Zetlin noted, for example, that "discounts have a way of taking on a life of their own." Indeed, the customer that receives a 15 percent discount for one purchase may well feel entitled to an identical or even greater discount the following year. Moreover, news of a discount extended to one client is often difficult to keep under wraps, and when one client finds out that his deal is not as good as the one that another client is getting, he is apt to react in ways that are not good for business. "What happens is customers talk," one executive told Zetlin. "You get a call from Fred, who thought he was getting your best deal, and found out last night at the bar that he isn't and is now unhappy with you." One way of minimizing the likelihood of running into such complications, say experts, is to make sure that you adhere to a uniform set of discount rules. Of course, some small business owners have to give customers different deals as part of their efforts to establish and grow their enterprises. Nonetheless, as one businessman recounted to Sales & Marketing Management, "[with] indiscriminant discounting '¦ you wind up giving different deals to different customers based on their negotiating ability rather than some more rational technique."

DISCOUNT SALES AND THE COMPANY SALES FORCE

Many businesses utilize sales representatives to deal with customers and close deals. But whereas sales personnel employed by retail outlets typically do not have the power to offer discounts, many representatives in the manufacturing and service sectors are provided with some leeway in this area. Both existing and prospective customers are well aware of this state of affairs. Small business owners, then, need to pay extra attention to this reality as they build their sales force. For as business experts in all industry areas will attest, many sales representatives are so eager to secure a sale—and thus a commission—that they will offer a discount on a sale at the first hint of a price objection. "Salespeople offer discounts too quickly because they get flustered and fear losing a deal, or because it's easier than making the customer understand why this product is worth more," wrote Zetlin.

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