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.
To head off scenarios in which salespeople might unnecessarily fritter away profits on a sale with an unnecessary discount offer, business consultants and successful salespeople recommend that entrepreneurs consider the following:
- Informed salespeople are formidable salespeople—Many requests for discounts are based on ignorance (feigned or not) of the difference between your company's goods and/or services and those of the competition, which may be dangling a lower price. The challenge for the small business owner, then, is to make sure that sales representatives can talk about non-price benefits authoritatively. "A rep with a thorough knowledge of his product has a greater ability to offer creative solutions to his customers' problems," wrote Barry J. Farber in Sales & Marketing Management. "Similarly, a rep must be able to articulate what makes his company different from the competition, and better suited to work with a customer. When a customer asks, 'Why should I pay six dollars for your product when your competitor is selling it to me for three?' the rep had better be prepared to answer: 'I understand your concern. My competitor is a fine company, but let me tell you a few things about our organization that makes us unique.' By going immediately to the company's strengths, the rep automatically colors the competition to look weak."
- Knowledge of client issues—Knowledge includes not only representative awareness of his or her employer's circumstances (inventory, profit margin, etc.), but also an understanding of the challenges facing current and potential customers. By taking a proactive approach that seeks out answers to customer hopes, strategies, and concerns, many representatives can head off attempts to secure a discount by highlighting customer service advantages that they can secure through your company. In addition, small business owners who are knowledgeable about key customers are better able to offer discounts that ultimately benefit their companies. For example, offering a small discount can be a good way to curry favor with a client that is on the verge of significant growth.
- Provide guidelines and training to sales staff—Sales personnel should be provided with firm guidelines regarding their authority to negotiate discount prices to customers. Moreover, many business experts counsel entrepreneurs—who often serve as their own sales representatives, especially during a business's formative years—and their sales staff to receive training in negotiation tactics so that they can better differentiate between customers who truly are unhappy with the price and those who are merely angling for a discount.
- Recognize industry dynamics—Some industries allow participants to adhere to set price guidelines fairly closely, while others—whether because of intense competition, economic problems experienced by target markets, or some other factor—may have to be considerably more flexible in providing discount sales to clients.
- Talk to the right personnel—Negotiations over price can vary considerably, depending on the personnel that are involved on the customer's side of the table. "There are a lot of people who impact a large purchasing decision, and some are charged with getting the best price," admitted one consultant in an interview with Sales & Marketing Management. But she also added that "some are charged with doing what's good for the organization, and some have to work directly with the results of that decision every day. Who you're talking to will determine how much emphasis there is on price'¦. A lot of people say that if you can show value the customer won't care about the price. But if you're talking to a buy whose job is to get the best price, he or she won't care about value. If you want to show better value, you had better also talk to someone more senior, whose job is to find value for the company's bottom line."
- Recognize sales representative priorities—Zetlin pointed out that "one of the chief problems with giving salespeople leeway to negotiate prices or offer discounts is that it creates a conflict of interest between many salespeople and their employers. After all, it's to the salesperson's advantage to close every deal—no matter how unprofitable—if she will always earn a commission by doing so." Small business owners who closely monitor the performance of sales personnel can curb such abuses to some degree, as can those who firmly communicate sales margin expectations to their sales force. But consultant Al Hahn suggested to Sales & Marketing Management that a better solution might be to tie the salesperson's compensation to the profitability of the sale. "In my experience, salespeople '¦ respond very strongly to the incentive systems they're given, and they'll do what the commission plan tells them to do to make money." By linking compensation to the profitability of the sale, representatives are thus rewarded for making good deals for the company, not just by the number of sales they make irrespective of incentives that are handed out to the client.
- Know when to look elsewhere for business—Some customers simply will not agree to terms without unreasonable discounts that cut too great a swath into your profit margin (or obliterate it altogether). In such instances, it is usually better to move on in search of other customers rather than continually butt heads with a single client. Certainly, individual business realities can color an entrepreneur's ability to do this. If the entrepreneur's business is predicating a big marketing push on marketplace legitimacy that it owes to its relationship with the client, for instance, then it may be forced to accede to the client's discount demands. But as Farber indicated, if a customer is unable to get beyond the price issue, it may be time to look elsewhere for business. "Salespeople waste a lot of time on prospects who are not qualified, don't have the decision-making ability, or are stalling them."
ALTERNATIVES TO TRADITIONAL DISCOUNT STRUCTURES
In addition to traditional discounts, wherein individual goods or services are offered at a given percentage below the original asking price, small business owners also have the option of instituting several different discounting variations, such as "earned" discounts, early-payment discounts, and multi-buy promotions.
Some companies offer their customers discounts if they meet certain requirements. Under this scenario, customers that agree to make large purchases, provide repeat business, or sign multi-year contracts are in essence rewarded for their business by receiving a discount on the price of the goods or services they have purchased.
Some small business owners offer discounts to customers who pay promptly (within 10 days is a common stipulation). Small businesses that do this are often relatively new firms that are operating under tight financial constraints. Unlike established business owners, who may have a financial cushion from which to draw to meet various business and/or personal obligations, entrepreneurs are often in greater need of securing prompt payment from customers. An early-payment discount provides customers with an incentive for them to make payment quickly. Businesses that utilize this discount option range from manufacturers to freelance writers.
Business consultants warn, however, that some customers may abuse this option by taking the early-payment discount, only to pay off the bill after the discount period has ended. Christopher Caggiano noted in Inc. that small business owners can institute a couple of different policies that can curb such abuses. One device that entrepreneurs can use is to make it clear that the early-payment discount will be offered only if collection can be made in person by the entrepreneur himself or a member of his staff. Another option is to charge customers for the difference on the next invoice that they submit. In most cases, the customer will pay the amount without complaint since it did not meet the previously agreed-upon terms.
Multi-buy promotions are an increasingly popular alternative to the standard discount pricing strategies, especially for retailers. Rather than knock 25 percent off the price of a product, some companies are choosing to offer "buy one, get one free" or "buy three for the price of two" promotions to consumers. This strategy is driven by statistics that indicate that such promotions are often so tremendously popular that the volume of sales outweighs the cost of the discount given. Business observers point out that many multi-buy promotions are made economical by the hidden savings that can be realized through them. "Supermarkets now have computer systems which recognize a second or third pack and automatically adjust the bill at the till, thereby eliminating most of the administrative hassle," wrote Alan Mitchell in Management Today. "And the fact that the goods being promoted come in standard packs eradicates many of the design, manufacture, and transport costs associated with other types of promotional offers."
Caggiano, Christopher. "Customers Take Our Early-Payment Discount—But Pay Late." Inc. October 1997.
Coleman, Calmetta. "The Evolution of Gift Giving: Deep Discounts Help to Draw Wary Shoppers." Wall Street Journal. 27 November 2000.
Farber, Barry J. "The High Cost of Discounting." Sales & Marketing Management. November 1996.
Hartley, Tom. "You Always Hear the Word 'Sale—But Does It Work?" Business First of Buffalo. 23 March 1992.
Marn, M.V., and R.L. Rosiello. "Managing Price, Gaining Profit." Harvard Business Review. September-October 1992.
Mitchell, Alan. "Multibuys that Wash." Management Today. May 1996.
Peppers, Don, and Martha Rogers. "Avoid Price Dilution By Making Yourself Valuable to Loyal Customers." Business Marketing. December 1997.
Rasmussen, Erika. "Leading Edge: The Pitfalls of Price-Cutting." Sales & Marketing Management. May 1997.
U.S. Small Business Administration. Walker, Bruce J. A Pricing Checklist for Small Retailers. n.d.
Zetlin, Minda. "Kicking the Discount Habit: Teach Your Salespeople to Stop Leaving Money on the Table." Sales & Marketing Management. May 1994.