When small businesses are looking to move their sales figures, one of the most common approaches they take is to offer a discount.
Here’s a problem, though: Unless you do the prep work, your discounts might end up damaging your brand or cutting into your profits.
How do you guarantee that your discount pricing will benefit your business rather than hurt it?
- You need to set firm objectives and know the different approaches you can take to reach them.
- More importantly, you need to compute the right metrics to ensure that you reach your goals.
This guide will show you how to discount your prices, set the right goals, and the best ways to measure your success—leading to both responsible discounts and profitable sales results.
Pros and Cons of Discount Pricing
There are many advantages and disadvantages that come with discounting your products or services. Understand what they are so that you know what to plan for.
1. Pros of Discount Pricing Strategies
Setting discounts on your pricing is a strategy that can drive more sales volume to your business, bring in new customers, and give you more advantages as well, such as:
Make Your Customers Feel Positive About Your Business
One advantage is that discounts make your customers feel good. Research shows that when people receive a coupon or savings offer, they become happier and more relaxed. It could be beneficial in the long run if these positive feelings can be associated with your brand.
Help Customers Choose Your Products Over Competitors
Discounts also make it less likely for people to compare your products with other brands, according to a study from the Max Planck Institute for Tax Law and Public Finance. This can help new customers choose your products over your competitors, giving you a foot in the door.
2. Cons of Discount Pricing Strategies
There are some potential cons to be aware of as well. Be sure to assess the risk before discounting your prices.
Discount Pricing Can Lower Perceived Value
Still, there are downsides to discounting. One of them is that once customers have your product or service, they will think it’s of lower quality. In a double-blind study, consumers who paid full price were more satisfied than those who paid discounted rates. They expected a better experience, and their evaluation adapted to this higher expectation.
Risk of Loosing Profits From Lower Margins
It’s also possible to end up without profiting much, or at all, when you offer discounts. While some of your discounted sales might be from people who wouldn’t have bought, you could also lose some profit margins from customers who were going to buy anyway—even if the product wasn’t discounted.
Because of these challenges, it’s important to know your primary goal when discounting.
Set Your Goals First: Before Discounting Your Prices
Before you pick a discount strategy, make sure you have a primary goal. Your goal will determine the type of discount you offer, how you’ll market it, and which customers you should aim to reach. Here are some of the goals you can aim for:
- Acquire New Customers - You’re offering a discount because you want new customers to be interested in your products or services. With a discount, they can try what you offer with lower risk on their part. Plus, if the discount is a limited time offer, new customers will have a reason to try your products and services now, rather than later.
- Increase Your Sales - Your goal is to sell more units of your product or service, regardless of how many customers buy. This could mean going for volume sales, bundling products with each other, and having customers buy as many items as possible before they check out.
- Gain Repeat Customers - Unlike acquiring new customers, getting repeat buyers requires a different mindset. You’re using the discount to encourage brand loyalty rather than enticing people to try your products. This discount is usually delivered via a loyalty program for current customers—and it works. According to research from Colloquy, a loyalty marketing firm, 55% of people enroll in loyalty programs to get discounts on purchases.
- Get Rid of Old Inventory - Sometimes, you need to run a discount just to clear your old inventory. Perhaps you need to make room for new products, update a product line, or focus on better performing products. Contrary to having a goal for increasing sales, the margins aren’t as important here. What matters is how quickly you get rid of stagnant items that otherwise wouldn't sell.
6 Types of Discount Strategies for Small Businesses
Once you’ve picked a goal for your sale or discount, choose the type of pricing discount that works best with it. Below are some common approaches to discounting. Keep in mind that you don't always have to pick just one type at a time. You can use multiple types of discounts for the same promotional offer.
1. Bundled Discount
For this discount, rather than lowering the selling price of one product or service, you lower the price of a group of items bought together.
In one example, Beardbrand, which creates beard care products, sells discounted bundles of their products. These bundles are different varieties of the same product type—such as beard oil or mustache wax—but are cheaper bought together than when bought individually. Customers can then try different scents of the same product to find the one they like best, or they could change up the scents they use daily.
The bundled sale comes with a few benefits:
- Bundling Increases the Number of Items You Sell - Since you’ll be selling several items within a single order, each sale means more items sold, more revenue per order, and lower costs per order. If you’re looking to increase items sold or revenue, regardless of the margins, the bundled sale is a good option.
- Sell Popular and Less Popular Products Together - Bundles also allow you to sell less popular products with stronger selling products. You can leverage the popularity of your best-selling items by enticing customers to buy it with other items on a discount as they’re making their purchase.
Customers Get to Try Your Other Products - Some of your products might have been marketed more extensively than others. If your other products are of equal or superior quality as your most popular products, encourage customers to try them by bundling them together. You’ll need to measure the sales of the less popular varieties, to see if they’ll increase after the discount.
However, when planning bundled discounts, you need to carefully study which products will be bundled together. If the products don’t seem relevant to each other, customers might see the bundle as a seller’s ploy.
To implement a bundled discount, look at the items that your customers tend to buy together. Consider also the problem that your strongest selling bundled product is trying to solve. What other items in your inventory are solving similar problems?
2. Prepayment Discount
You can also offer a small discount for people who can pay for the products and services in advance, perhaps months or weeks before they are shipped or received.
Prepayments can help build cash flow, since customers are encouraged to pay earlier. This means that you can use their advanced payments to purchase additional inventory, to buy supplies in bulk (probably at a discount), or make other investments. However, prepayments don’t work with all types of businesses. Only products or services that need recurring payments can benefit from this.
Prepayment discounts are common among software-as-a-service businesses. A service like Dropbox, for example, lets customers select between monthly and annual billing. Those who pay annually get a discount on their total subscription payments.
Physical products can also take advantage of prepayment discounts if they do recurring billing. Ipsy, a retailer that sells subscription boxes of beauty products, gives customers one of their monthly boxes for free if they pay a year in advance.
If your business model can work with prepayments, find out if you can offer discounts. Can your target customers afford to pay a larger amount, most likely via credit card? Do they make advanced payments for other similar products or services? If you find that your customers are willing to pay a discounted lump sum over recurring charges, have a plan for how you're going to reinvest your increased cash flow wisely.
3. Volume Discount
When you offer a volume discount, your customers end up paying less per item as long as they buy a larger amount of that item. For example, Ujido, an online matcha tea provider, offers a 10-percent discount if you buy 8 boxes of their product.
Because you’re enticing customers to buy more units per order, volume discounts are a good option if you’re looking to clear inventory or increase the average value per order.
4. Event/Seasonal Discounts
Event-based discounts tend to happen around a specific date or season, and they are often recurring. This includes discounts that take place during holidays, such as promos for the New Year or Valentine’s Day.
In the example below, Dan’s Chocolates has a “Super Snowman Sale” for December — a month when people tend to send out gifts. These chocolates are intended for gift-giving, which is why the discounts are for large orders shipped to multiple addresses.
You can also offer discounts during widely recognized discounting days, such as Black Friday, Cyber Monday, or Free Shipping Day. The offer below is from an email campaign from Bitdefender, giving customers a 70% discount if they buy on Black Friday.
During holidays or special discounting days, most people tend to be in a “buying mindset”. Your business can have a share of that influx of consumers if you offer discounts during these times. Seasonal discounts can also help businesses shed out-of-season inventory (think steep discounts on winter clothes during the summer).
But because these discounts are often created to let go of inventory or attract new customers in a larger scale, these aren’t meant for high-end brands. You’re likely to attract bargain hunters rather than loyal buyers. Your margins could suffer as a result. In fact, most shoppers during Black Friday tend to flock towards items that are marked at least 76-percent off. Discounting popular or high end items this much might even cheapen the products from the customers’ perspective. Customers might also defer on buying your products and will wait until the seasonal discount to get a better deal.
5. Free Shipping
Another type of discount is offering free shipping. Several studies show that offering free shipping can increase sales. Free shipping can also lessen your cart abandonment rates. According to a study from Business Insider, high shipping costs are the top reason why shoppers abandon their online carts.
But the danger with free shipping is that packaging and deliveries cost. Not charging for shipping can hurt your business if you’re working with low margins or if shipping costs aren’t factored into your product prices.
To make sure that free shipping pays off, you can have free shipping available when an order reaches a certain amount. One example of this is The Tie Bar, which offers free standard shipping for orders worth $50 and above. Orders worth less or orders that require special shipping have additional fees.
You can also restrict your free shipping offer to a specific location or period. In the example below, online retailer Huckberry has occasional “free shipping” sales that allow you to buy anything from the site without paying for shipping—as long as you buy within a specified 24-hour window.
Before you release your free shipping offer, make sure that you’ve computed how it affects your profit margins per order and overall. Also, know how many sales you’d need to make the free shipping offer profitable.
6. Buy One, Get One Free
Sometimes, a discount isn’t enough to get more customers. But if you offer something for free, you’re sure to attract more interest. A study published in the Journal of Marketing found that most shoppers prefer to get items for free, rather than at a discount—mostly because they find difficulty in comprehending fractions, while “free” is always understood. This is reflected in buying behavior as well. In a separate survey 93-percent of consumers reveal that they’ve taken advantage of “buy one, get one free” promotions, while only 79-percent have used discounts.
You don’t have to stick to “buy one get one free”, per item either. You can offer a completely different item for free, pairing a popular high-margin product with a freebie that’s less expensive to produce, but hasn’t sold well. Or you can require a higher quantity of items before the customer gets a freebie, such as this “Buy 2 Get 1 Free” example from Sally Beauty.
Because of how simple and attractive “buy one get one free” is, it’s great for attracting impulse buys, moving inventory, or pushing the sale of less popular products. Just make sure that your bundles still have a wide enough margin to be profitable, so that you’re not giving away your revenue for free.
How to Ensure Profitability When You Offer Discount Pricing
Now comes the hard part: making sure that the type of discount you pick lines up with your business goals. To make sure that you’re growing rather than losing income from discount pricing, you need to do a little math. Figure out the following:
Compute if your discount will still allow you to profit from each sale, and how much that profit will be. Here’s how you can keep your margins intact:
- Keep Your Marketing Costs Low - While you need to promote your discount, make sure you don’t overspend. Doing so will cut in on your margins, and you won’t realize by how much until the discount is over. Focus on marketing your discount to leads that you are already in contact with, such as email subscribers, existing customers, and social media followers. While you can spend to attract more leads, account for these marketing expenses when computing your projected profits from the discount.
- Segment Your Offers - Have your discount offer reach only dormant customers or first-time customers, rather than customers that have a history of being repeat buyers. This increases the chances that you entice new sales without losing out on the margins of sales that would have happened anyway, regardless of the discount.
- Offer Upsells - Apart from the discounted items, make sure to sell relevant non-discounted items to these buyers as well. Even if you can’t increase your margins from discounted items, you can at least increase your profit per transaction.
If you need additional help, the following tutorials can help you compute for your profit margins and maximize your sales during your discount:
- Microsoft ExcelExcel What-If Analysis: How to Use the Scenario ManagerBob Flisser
- FinanceHow to Measure Your Business's ProfitabilityAndrew Blackman
- CopywritingHow to Increase Your Online Sales With Psychological TriggersBrad Smith
2. Customer Acquisition Cost
When you offer products on sale, how much you spend acquiring new customers changes. To your usual customer acquisition expenses, add your lost margins during the sale, as well as your additional marketing expenses for the sale. Check out this detailed tutorial if you need a step-by-step guide for computing your customer acquisition costs before the discount, during, and after.
Ideally, your discounts shouldn’t increase your customer acquisition expenses by much. But to guarantee that you get more for every dollar you spend acquiring customers, here are some techniques you can apply:
- Convert New Customers to Repeat Customers - When new customers buy from your business for the first time, do everything you can to convert them to becoming repeat customers. This will increase the lifetime value of each customer, justifying your higher customer acquisition cost.
- Maximize Your Margins During a New Customer’s First Order - Just like the above tip on increasing margins, offer upsells and other relevant items apart from your discounted offer. The higher a customer spends during their first transaction, the more you can make up for any increase in acquisition cost.
Reduce Online Shopping Cart Abandonment - It’s such a waste when shoppers don’t push through with the transaction at the last minute. Before you offer your discount, make sure that you’ve optimized your customers’ online shopping experience so that abandonment rates are low. One way to do this is to send a reminder email a few hours or a day after a customer abandons their cart.
3. Targeted Sales Volume
Since increasing sales is a common goal for businesses offering a discount, you need to set your sales targets. But don’t just set an arbitrary amount. Make sure that your sales targets are high enough that you maintain or increase your profits, even if you’ve lost a bit of your margins from the discount.
To estimate your targeted sales volume, use the following tutorial and spreadsheet to compute for your gross margin percentage and your break even revenue. Compute for these items twice: once with regular pricing in mind, and another time with the discounted price. How much does your break even revenue change?
More importantly, how much additional sales do you need to make up for the difference? The table on this page can help you estimate the percentage increase you need in your sales volume to make a profit.
Learn How to Set Your Discount Pricing Strategically
For discounting to pay off, you need to have a strategic approach. By knowing your goals and matching it with the right type of pricing discount, you can avoid the common challenges that come with discounting and instead bring in more sales and revenue.