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Especially in a tough economy, companies often discount their products and services to increase sales.  The advantage of this approach is that it attracts attention–and has the potential to get prospects that ordinarily would not buy to try out your goods and services.  The hope, of course, is that once they experience what you have to offer that they’ll buy again.

The question is does it work?  And for whom?

Discounts do increase sales volumes

There’s no question that discounts increase sales volume.  To find evidence, you need look no further than to a Reuters article that ran earlier this month about automobile industry sales.

The lead sentence reported:  US auto sales jumped to a seven-month high in March led by a 41 percent surge at Toyota Motor Corp after the Japanese automaker offered the steepest discounts in its history to win back sales lost during its recent safety crisis.  Here, it’s worth noting that discounts were so successful in increasing sales volume that they did so despite the fact that the company had experienced a number of setbacks that tarnished its reputation, and presumably its brand.

But, discounts can reduce profitability

Nevertheless, just because discounts can increase sales, doesn’t mean that discounting is a good strategy.  Discounting is only a good strategy if it doesn’t impair long term profitability–which it often does.

In the automobile example above, Toyota took a loss on any cars that they sold to customers that would have bought from Toyota anyway.  Unless they could attract enough customers–that would otherwise have bought from the competition– to offset those losses, any increases in volume would come at the price of reduced profitability–on the cars themselves.

Discounts don’t–and shouldn’t–happen in a vacuum

Of course, there’s also the issue of cash flow.  Automobile dealers have a lot of cash tied up in inventory.  Especially since this inventory loses value as the next model year approaches, it may make sense to discount even if only to keep customers from delaying their purchases.

The issue, however, is even more complicated.  In the automobile industry, service revenues depend on automobile revenues.   Therefore, companies may discount automobiles if they believe profits from service sales will offset any losses on the cars themselves.

Finally, before discounting companies need to take into account the competition.  Any time one organization starts to discount, it runs the risk of starting a price war as the competition rushes to meet or beat its offers.

This post has focused on the auto industry.  Yet, every industry faces similar considerations.

Different industries, different discount considerations

In the airline industry, inventory is perishable.  If an airline flies with empty seats, it will never recoup the associated revenue.

Yet, we don’t see airlines routinely discounting empty seats, even as the departure date nears.  If they did, people whose schedules were flexible would wait to buy, eventually driving down the price of all seats.   Therefore, when airlines do discount they do so upfront–and only make those offers available to those who have flexible schedules and/or will fly at non-peak times.  In so doing, they ensure that those who will pay a premium for seats continue to do so–and thus preserve profitability.

Subscriptions are at the other extreme.  They’re not perishable because the customer gets the latest greatest features when they’re available–as long as they renew.

Yet, both magazine and software publishers often discount to attract new subscribers–often in the form of a free trial.  While they hope that customers will upgrade to a paid package to either retain the service, or get more functionality, this often is not the case.

For one thing, free and/or discounted offers often attract people who would never otherwise consider the product–and therefore abandon it when the price increases.  When this happens, the company wastes sales expense on unqualified prospects.

For another, even qualified customers who buy at a discount often come to associate the discounted price with the value of the product.  Therefore, they become disgruntled when the price increases without the addition of new features that they find valuable.

Thoughtful discounts  works

As I mentioned in my article, Marketing is so much more than promotion: just ask my hairdresser, thoughtful discounting works.   I went to my current hairdresser when my former hairdresser missed our appointment because she was running late–fully intending to make this a one-time visit.

After styling my hair, the new hairdresser gave me a coupon that offered almost 50% off my second visit.  As a strategic marketing consultant,  I was impressed with the move.

Had the salon offered newcomers discounted services, it may have attracted individuals unwilling to pay the salon’s normal prices.  On the other hand, offering a discount after the first visit, encourages clients who have already demonstrated their willingness to pay full price to come again.

When I commented that the salon had done exactly what I encourage my clients to do,  the stylist confirmed that the decision was strategic. She said most first-time clients come because their current stylist is unavailable. The owners, knowing it takes time to create a relationship, use the coupon to provide an incentive for satisfied clients to return for another visit.

It worked.  I returned–rationalizing that my hairdresser could have called to let me know she was running late.  A year later, I continue to go to the new hairdresser, even though I pay full price.

Review the pros and cons before discounting

Before you discount, review the pros and cons.  Ask first:

• What do we hope to achieve by discounting?
• How much business will we now win that would otherwise lose to a competitor?
• How much profit will we forego  by selling discounted products or services given that customers who would have paid full freight can now pay less?
• What’s the benefit to us if someone buys sooner rather than later?
• How will the competition respond to the discount–and how will that affect us?
• How will discounting affect perceptions about the value of our product or service?

Then, you’ll know if discounting is a good way to increase sales.

Barbara Bix is the Managing Principal of BB Marketing Plus and and specializes in helping companies with complex products and services increase sales.

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