Everyone loves a bargain. It’s only human to be attracted to something that costs less than its original value. However, for business owners, providing discounts may not always be the best solution.
While discounts and negotiation can help close a deal, they are risky business when used improperly at the top of the funnel in attracting clients. From damaging your reputation with an incongruent price message, to alienating your most loyal customers, discounting is an unprofitable approach to sustainable, long-term growth.
Take Bob the Plumber, for example. He offers a discount to his first-time customers, and they love him for it. But this puts Bob in a precarious position. To make up for the discount he’s giving away, he now charges more for the actual work that needs to be done. Now he loses the sale that actually makes him money, and generates a 1-star review for appearing to price gouge, all while making his very best customer angry with him for charging him twice as much for the thing he’s now offering to “first-time buyers only”.
Tut tut, Bob. You keep messing up, you’re going to end up becoming an Electrician.
With this in mind, how do we know when giving a discount is the right move?
The answer, as with most things in business, is to understand the dangers of discounting and what alternatives there are before taking the plunge. So keep reading to find out more.
How Does Discounting Really Work?
Discounting is a common practice among businesses of all sizes. It can be used as a way to attract new customers, activate sales, or simply as a way to show appreciation for your loyal patrons. But how does discounting work, and what are the best ways to use it in your business?
Discounting and other transactional offers, known as Sales Activation, will always appear to be the superior option at the front end of business growth. What Binet and Field ascertained from a decade of research on the subject is outlined in the above graph. Eventually, your brand strategy drives the long-term growth of your company, leaving discounts in the dust. Not only is branding exponentially easier to do properly (when you know how to do it right), but your costs continue to go down.
For example, one of our clients at Wizard of Ads™ who started with us at $21 million in revenue and a 12% marketing budget, sold for one of the highest multiples the industry has ever seen as they finished at $115 million in revenue and 3% marketing budget in 7 years. Starting at a 60% branding to 40% lead generation budget, they finished with a 95% branding and 5% lead generation expense. All without providing discounting in their marketing message or lead generation.
The most basic form of discounting is simply offering a lower price on your goods or services. This can be done in a variety of ways, such as offering a percentage of the regular price, setting a special sale price, or giving a certain dollar amount off the total purchase. Discounts can also be offered for specific items, groups of items, or purchases made during certain time periods. Often discounts are paired with arbitrary deadlines in a false sense of security that this fake urgency somehow actually has an effect on prospects.
“All things being equal, people will always want the lowest price. That’s why a proper brand strategy is essential to long-term success.” -Ryan Chute
Another common discounting strategy is offering bundle discounts. This is when businesses offer a lower price for larger purchases. Bundle discounts can be an effective way to encourage customers to buy more of your complimentary products and services at one time, which can save them money and make it more convenient for them.
There are a few things to keep in mind when using discounting as a marketing strategy:
- Be strategic about when and how you offer discounts. You don’t want to discount your products too often or too deeply, as this can erode your profits, company integrity, and customer loyalty.
- Consider using discounting as a way to clear out old inventory, rather than discounting your newest products. Any time you discount with a really good (not overused) reason, you are protecting your integrity.
- Make sure your discounting strategy is aligned with your overall branding and marketing goals. Discounting can be a great way to attract new customers, but what message is that sending to your most loyal customers?
When used strategically, discounting can be a powerful tool to help you reach your business goals. If you think you could use some help with your pricing strategy, our team at Wizard of Sales® can help.
Book a demo with us today to learn more!
Dangers of Giving Discounts on Products and Services
As we’ve mentioned earlier, discounts may seem like a harmless way to attract customers and boost sales. However, discounts can actually be quite dangerous for your business. Here are some risky discount factors to keep in mind before you try it for yourself.
Creates Unwanted Expectations
Once you start discounting your products or services, customers will begin to expect them. This means that if you suddenly stop discounting, they will be less likely to buy from you at full price. In effect, you become the reason your customers are price sensitive. You are literally causing the problem you’re hoping to avoid.
Discounting trains customers to wait for a sale before they make a purchase, which erodes any chance of a full-price purchase. In fact, studies have shown that discounting can actually lead to a decrease in revenue. For the perpetual bargain-hunter customer – the transactional shopper – you get sucked into oxygen thieves who will happily consume 80% of your time, and generate 20% of actual sales at the lowest possible margins and highest possible expectations.
Erodes Trust in YOU
When you discount your products or services, it sends a signal to customers that what you’re offering isn’t worth the full price. When you use discounting as a top-of-funnel attraction tool, you are telling your customer that your prices are not to be trusted, that you are desperate for business, and your prices are cheap. This will damage the relationship you have with your customers and make it harder to sell to them in the future.
As a business owner, you want your products and services to be associated with quality and value, not cheapness or deceit.
Squeezes Your Profit Margin
When your products and services are discounted, you are essentially eating into their own margins and profits. This is due to the fact that to offer a discount, businesses must either sell larger quantities or make less money per item. In turn, this can put a serious strain on your business’s finances and make it difficult to stay afloat.
“If you want to give stuff away, volunteer at a soup kitchen.” -Ryan Chute
Don’t take this to mean you shouldn’t or couldn’t raise your prices up enough to do a little dickering. Just know that haggling is done behind the scenes and with good reason, not at the top of the funnel as a means of attracting customers.
Forces Tough Choices
In order to make up for the loss in profit margins, businesses have to cut corners in other areas. This can include using cheaper materials, skimping on customer service, and hiring less qualified employees. As a result, the quality of your products and services may suffer, which can damage your reputation and drive away customers.
“Nobody has ever done epic shit with low margins in residential home services.” -Ryan Chute
Are There Alternative Discounting Methods?
Yes! Discounting is often used as a way to encourage customers to make a purchase, but other options may be more effective. Here are four great alternative methods to discounting that you can use to drive sales.
A loss leader is a product or service that you can offer at a consistent price for new and old customers 365 days a year. This is usually the thing that has a prospect step into your funnel like a spring A/C tune-up or a water heater drain and flush. While you do not make money on the loss leader, you set yourself up to “get the car on the hoist” in a bid to find legitimate sales opportunities from priority repairs, necessary scheduled maintenance, and discretionary purchases.
Feature Items are a thing you offer that you have a limited supply of. You are baking in natural urgency by having a legitimate limited supply of them. This may be a special buy you made on a product that is no longer available at a great price to a sample sale of the first 100 customers trying out a new service for a special introductory offer in exchange for 5-star reviews and a little patience while you perfect the delivery process.
Restack Your Value Stack For The Slam Dunk Second Sale
Instead of discounting money, try restructuring or restacking your value stack to get in the door for the second sale. Grant Cardone LOVES the second sale, and so do I.
When you have the system pulled apart you can naturally offer a discount for the second sale. You can do the work faster since you’ve got things apart already. Think of the complimentary sales that your people can make that make it a no-brainer for the customer to say YES!
“When you make it easier for your sellers to sell, and your buyers to buy, you close more sales at a higher average sale and profit.” -Ryan Chute
For instance, if you were an HVAC company, you might eliminate the need for a tune-up, instead opting for a clean and check. This means you aren’t replacing parts or taking as much time, but you are still setting yourself up for the second sale.
When you do this, you are able to keep your prices the same (or even raise them slightly) and still enjoy an increase in business. It’s not WHAT you say. It’s HOW you say it.
People are often willing to pay a little more for a product or service when they know that they’re getting competent convenience that won’t need constant repairs or replacements that feed on their precious time, energy, and money. As long as you deliver on what you promise, you’re on the right track.
So, if you want to deliver more value without discounting, take a look at your business and see where you can make some changes that will save you money by providing high-value solutions for a low cost of your technician’s time and expenses to your business. You may be surprised at how much you will save!
Say “No” With A Plot Twist
There will come a time when customers will ask for a discount, and it’s important to know how to tactfully say “no” without offending the customer or appearing unprofessional.
Discounting your products and services can be tempting, especially when you’re trying to attract new customers. To say “no,” you need to sell your products and services based on their perceived value. When the value you offer (without overpromising) is worth more than the money in their pocket, they will happily make the trade.
The next time a customer asks you for a discount, smile and say:
- “You only cry once when you pay for quality. You cry many times when you go cheap. Let’s get this done right the first time. Sign here.”
- “We can absolutely look at less expensive options. Let me ask you though. Are you looking for the best price on the right thing, or just the cheapest price?”
- “You are so right. It is expensive. Good stuff costs more. Doing it right costs more. Keeping corners costs more. But it’s worth it, right?”
- “Everything is over budget these days. In fact, we have a club that meets at the Rec Center on Tuesdays. My wife is the Chapter President. You’re invited to come. Bring cookies. This is the right solution, though, and that’s what matters most. Let’s do this. Sign here.”
Saying “no” to discount requests can be difficult, but it’s important to remember that discounting your products and services without a really great reason is a fool’s errand. All you’re doing is eroding your brand and devaluing your business image. By standing firm on your prices, you’re sending a message that your products and services are worth the investment you’re proposing.
“Until further validated, treat all requests for a discount as complaints, not objections.”
Important Questions To Ask Before Giving Discounts
Discounts can be a great way to close a sale, but they will also eat into your profits if you’re not careful. Here are some important questions to ask before giving discounts:
- Who do I want to attract as a customer?
Do I want to accommodate the cheapy cheapy customer who will still have absurd expectations of my products and services after the sale is closed and delivered?
Or do I want to attract the less price-sensitive customer who is willing to pay a reasonable premium for competent convenience?
- Am I helping the people I want to serve win?
Managing expectations is a service to our customers. Are you compelled to discount to make the sale, or to deliver the very best buying experience?
Delivering a world-class buying experience cost a lot of money.
- Am I acting and appearing trustworthy?
What signals do I want to send to prospective and current customers with my discounting strategy? Is there a way I can still negotiate without negatively impacting my integrity with all potential stakeholders?
Discounting with really really good reasons is always an option. Desperate discounting to get deals done is shady as shit.
- Am I demonstrating gratitude to my loyal customer base?
There is a fine line between generosity and entitlement. Often this is lost in survival mode thinking that has customers doing everything they can to get the lowest price, and salespeople doing everything they can to close the deal.
When we act with a sense of gratitude and humility, abandoning the ego at the door, we can always find a way to make things work for the people we want to serve.
- How much will this discount cost me?
Your pricing strategy should take into account how much you want to make in Gross Profit when the sale is closed. This means you’ve got to leave room for negotiation when building your price, including your commissions, finance fees, and discounts which are all calculated from the retail number, not the cost of goods sold.
The higher your price is to start, the more generous you are perceived to be if you are discounting for a really really good reason.
- Is it likely I’m losing a price battle?
No matter what your price is, you can instantly not make it about price if you are happy to beat your competitor’s price. In cash? Nah. I’m going to not only meet their price, but then immediately add 2 years of club membership for free to be the better winner. Not for Chuck in a Truck, but definitely for any other legitimate company in my market. Ain’t nobody going to outsell me.
Don’t think I won’t go for the juicy second sale after closing the price match though. There’s more than one way to recover profit while adding tremendous value for the purchaser. Sales is a battlefield to win the heart and mind of the customer. Sometimes the best way to win the war is to lose the first battle.
- Will my decisions hurt my bottom line?
You’re not running a soup kitchen. The last thing you need to do is trade dollars. If there’s no net profit at the end of the month, you’re doing it wrong. Charge appropriately, work on your efficiencies, and donate a portion of your profits to a worthy cause.
- Am I affecting the quality of my goods and services?
The service you sell can have an adjusted scope of work, but the quality of your work can never be compromised. I have seen too many situations when the owner believes this, but his team most definitely does not.
Never compromise your quality of service and have a Selling System™ that protects your reputation. This could mean how you pay your people, to the quality assurance checks that inspect the things you expect.
When done correctly, discounting is a powerful tactic to increase revenue and appeal to customers. However, if you are not careful, discounts can do more harm than good.
By showcasing the value of your product or service instead of focusing on the price, you will find that your business attracts more customers and generates more revenue.
As a business in the residential home service industry, your customers are entrusting you with their three most cherished treasures – their money, time, and energy. To build trust and confidence, it is essential that you focus on providing quality over anything else.
Want a persuasive discounting strategy? Wizard of Sales® is here to help.
Book a call with us today!