To discount ... or not to discount?

Discounting can be dangerous. It's all too easy to train your customers to only buy when they can find a discount. And once customers are used to a discount every time, then they'll only buy when there's a really good discount. All too soon you can find yourself in a race to the bottom with a brand that has become a bargain brand and your site plastered with huge "% off" banners all over it.

A great example of this in the UK is the restaurant chain Pizza Express who deliberately moved into discounting to improve their reach. They succeeded in this, building up a database of 3.6M customers(1), but at a cost. The majority of customers will now only eat in Pizza Express if they have a voucher. With an 80% gross margin they can afford this but it is a significant cost to pay for increased exposure. And once you've done it, there is no way back.

So, ideally you should avoid discounting, right? Wrong. Discounting serves a valuable purpose and is a great way to nudge your customers (and potential customers) to do what you'd like them to do. But you need to do this without creating the expectation that they'll always be able to get discounts from you.

The key rule of thumb is:

Discounting is good so long as you can legitimise the discount.

For instance there is rarely an issue with discounting if a customer is receiving a discount...

... because the business model allows it to undercut the competition

... because the product is end of season

... because they've bought a lot

... because they're a new customer

... because they're a loyal customer

... or because they've brought other customers to us

All of these are legitimate and a customer can understand why you're able to offer them a reward. If a retailer offers a discount without justifying it then it just comes across as though the retailer is charging more than they need to on the site and a customer would have to be a mug to pay full price.

I was talking to the Marketing Director of a large online retailer recently and he was describing how much pressure he is under from his CEO not to discount and not to devalue the brand. The CEO is right to set a culture whereby discounts are used sparingly but the marketing team need to be given the opportunity to use discounting intelligently where it is the business's interest. Refer-a-friend is a great example of this. The customer can understand why they are being incentivised to share and to buy for the first time and therefore the discounts are legitimate. Customers will only expect repeat discounts if they can bring in more new people (which is in the interest of the business if they do).

In my view the only times when you should be offering discounts on your homepage or in your checkout are when it's part of your business model or proposition (e.g. if you're able to provide cheaper products because you cut out middlemen) or if the competition has gone down that route and you need to follow suit. In this case you'll go down the route of being a bargain brand but you don't have much other choice.

Good management teams are absolutely right to be careful around discounting but they shouldn't let it prevent them from using marketing channels that require it. Refer-a-friend is a great example of one of those channels. If in doubt, the right question to ask yourself is:

"If I give the customers a discount this time, will it create an expectation that they can automatically get a discount next time without doing something I want them to?"

If the answer is yes then beware.

Notes

1 Pizza Express Data