Dangerous discounts
(and how to avoid them)

It's natural to go back-and-forth about if you should offer discounts. A solid strategy around your pricing promotions will ensure that you are helping (instead of hurting) your business.

For a limited time only, 0% off.

For a limited time only, 0% off.

You might think that the solution to your less-than-stellar sales is to offer a promotion, discount, bundle or freebie. And that is OK. Seriously, I know I could get on my soapbox and proclaim that all discounts and sales are bad, but they aren’t – when part of a complete marketing strategy (see how I threw that in there?). The biggest problem with price promotions is that they can be the lazy solution to boosting your revenue short-term, and may end up hurting your business more than they help it in the long-term.

Entrepreneurs fall into an ‘I’m stuck for ideas, so why don’t we offer a discount’ trap because they don’t have the time to think of anything else. I’m going to share with you how those sales can hurt or help your business when thought out properly.

A whole lot of bad customers is not a good problem to have.

One of the biggest problems that come with offering discounts is that you will likely get the wrong people to buy from you. This is especially dangerous when you are selling something of a limited quantity (like your time) or at a loss (like a product at or below cost). You might see other businesses, even your competitors, offering promotions at prices that don’t make any sense to you. We will get into why they are doing that in a minute. First, let’s discuss how anyone could be the ‘wrong’ type of customer.

The customers you are attracting with deals may have no intention of ever paying for your product or service at full price. If you are a course maker or service-based business, your discount customers are less likely to be fully engaged, provide information or feedback when you need it, or complete the project – costing you time and energy through following-up and changing your schedule to accommodate them. Not only that, they are more likely to complain, leave negative reviews, or request more than the original offer from you (scope creep – the pain is real). They do these negative things not because they are bad people, but because they do not value the transaction.

Discounts can damage your value and make full-price customers angry.

Another danger of discounts is sending the wrong message to your existing customers about the value you provide. Price promotions automatically lower the perceived value of your product or service. People who have purchased at full price will understandably feel ripped off if they see you promoting discounts later. Those who have not bought anything from you may hold out to see if the price goes lower. Setting the precedence for discounts means that people will be more likely to hold out for a deal when they want to make a purchase from you. There are some ways to combat all of these issues, but it is important to get the balance right.

So what’s the worst that can happen?

At their worst, price promotions may cause your dream customers look for alternatives, bankrupt your business, and fill your days with clients who drain the life out of you and end up demanding refunds anyway. Ok, that may be a bit extreme. Actually, something I’ve seen more often is clients spending time and money on promoting a poorly planned sale and… **crickets**. Combine the loss you have from pushing your sale with your now devalued product or service and a couple bad customers, and it’s no wonder that so many entrepreneurs think marketing “just doesn’t work” for their business.

If there are so many negatives, why would you offer promotions at all?

Usually, the thought process that goes into offering discounts or deals includes one or more of the following reasons:

  1. You are insecure about your pricing, and worry that no one will buy at the regular price
  2. You think that once people have actually bought, they will spend more money with you or tell their friends
  3. You’re trying to steal market share (people already buying similar products or services) from a competitor by being cheaper

You may already know that I’m not a fan of hitching your wagon to the ‘cheapest available option’ benefit when pricing and promoting your service. Someone will always be able to undercut you, and you will build a following of people always hungry for a better deal. Instead, when you price your services you will want to focus on the value that the features and benefits you provide to a customer. However, pricing promotions and discounts through short-term campaigns and offers can help get people over the fear of buying and build loyalty among existing customers.

That’s right, getting someone to actually open their wallets to you can make it easier to pay you for stuff again in the future.

Discounts are just another paid marketing tactic.

Wrap your brains around this folks.

The first thing you need to understand is that discounts are a marketing tactic, just like advertising. What I mean by that is the amount you discount an item is part of your marketing budget. If you offer $20 off on a product or service, that’s like selling it at full price and spending $20 on advertising. Or selling it at $10 off and spending $10 on a sales commission. In each case, you are spending $20 on marketing that item.

The guarantee that people will make a purchase before you’re out your $20 may make discounts seem safer. However, all the risks that come with discounts (see above) can negate that safety if you are not careful. So when you are offering a discount, you should always ask yourself if it would be less expensive or damaging to your business to get the sale through some type of marketing campaign.

Retaining your value while offering a deal.

We talked above about how people can diminish your product or service’s worth if you offer discounts. Fear not. There are ways to keep the value associated with your product or service high. One way is to make the discount scarce – for a limited number of people or a limited amount of time. Another is to offer the discount only in a bundle.

Getting the right people to buy your special offer.

It’s incredibly important to share your deal with your target market, and make sure they know it is for them. You can do this by focusing on where and when you share your message, and what content it includes.

Using discounts and sales as a relationship builder.

Offering promotions for only them will keep your existing customer base loyal and tuned-in to your messages. You may have heard the phrase ‘it costs less to keep an old customer than to find a new one’. That doesn’t mean that it’s free to keep an existing customer. Offering deals to your loyal customers can help create brand evangelists (aka customers who tell everyone they know about you). It can also help offset the pull for them to switch from competitors.

Loss-leaders and the CLV.

I mentioned before that you may shake your head sometimes trying to understand how a competitor could offer such a great deal. You might know that the cost of an item they are selling is $50 (and that’s with zero profit), but they are selling it for $20, meaning they are losing $30 for every sale. This is called a loss-leader, and it seems crazy until you understand the strategy behind it.

This tactic uses a special number, and it is called the Customer Lifetime Value (CLV). Your CLV can be complex to actually figure out and depends on your business model. For the sake of keeping it super simple, it is the amount of money your average customer spends with you over your entire relationship.

Generally, this competitor would have done calculations to determine that, on average, their customers spend enough money with them over a number of years to make more than their loss back in profit. In fact, knowing you CLV can help you dramatically expand your customer base in a pretty low-risk environment. Of course, if calculated wrong it can wreck havoc on your cash flow and bottom line.

Loss-leaders come with their own set of considerations. You will be spending the money now and making it back over a period of time. This means you would want to understand how long it takes to make your first $30 back from your customers. You also need to consider and any financing (interest, inflation) that goes along with that. Also, customers buying at a discount may have a different CLV than customers who bought at full-price.

If you are thinking a loss-leader is the right move for your business, I highly recommend working with a professional. They will help you to figure out the right price, timeframe and number of units to use.

Proper planning is the key to a successful promotion strategy.

Part of figuring out your marketing strategy is getting all of your numbers in order. When you’re just starting out, you will need to make some assumptions. The important part is that you start testing those assumptions to see what sticks.

Throughout the promotional period, you’ll also want to track how people heard about the promotion. Some ways to do this are by asking them or using a coupon code, special URL, or analytics software.

You may choose to have occasional limited-time offers or to repeat the same offers annually. Just beware of being in sale mode too often or else you risk damaging your brand value.

Did I miss anything? Have you experienced any negatives or positives in your business when it comes to offering discounts?

What do you think?