4 Tips for a Foolproof Discount Pricing Strategy

Base image by Allison McDonald (Creative Commons)

1. Use restraint.

Offer discounts sparingly — not just because they affect your bottom line, but also because overusing them can impact the perceived value of your brand over time. A 2009 study from Indiana University (IU) Kelley School of Business found that providing discounts on some types of products causes consumers to permanently expect to pay less for those items.

Brands such as Kohl’s department store, for example, offer discounts with such regularity that most customers wouldn’t even consider paying full price there. Its business model is that everything is always on sale — sometimes a bigger sale than normal, but always a sale. A model like that dilutes the real price, confuses the market and tells savvy buyers that they should ask for a greater discount because you don’t hold firm on anything.

Shanker Krishnan, coauthor of the IU study, says, “It’s particularly important that shoppers don’t come to associate luxury items with lower prices” because brand loyalty can suffer when the discounts are removed. Imagine if Lamborghini held a quarterly sale where the company dropped the price of its cars to $25,000. You wouldn’t be quite as star-struck by your neighbor’s new wheels, would you?

2. Build your brand.

Think back to when you set your prices. You didn’t pull them out of thin air, right? You studied your costs, customers and competitors. You researched the market and considered your revenue target. Only then did you set what you considered to be a fair price. That’s why, when someone asks you to price match a competitor or requests a discount, your first instinct should not be to drop your price but to demonstrate to customers why your brand is worth full price.

Let’s use Apple as an example. Apple doesn’t discount new products. Over the years, the company has leveraged emotions to create a brand that is seen as aspirational, innovative and perhaps most importantly, consistent. Everything from its packaging to its stores to its online presence has a uniform and recognizable look.

People line up around the block in Amsterdam — and around the world — to
get their hands on the latest Apple products. Photo: Floris Looijesteijn (Creative Commons)

Thanks to the strength of its brand, Apple doesn’t have to use discounts. Evangelists line up around the block each time a new product is created and consumers never consider postponing a purchase until the next big sale or asking for a discount. Apple knows and believes in the worth of its products enough to charge full price, and you should too.

3. Show off your differentiators.

No matter what you’re selling, price should not be the only factor separating you from your competitor. Find the things that make your company special and create marketing campaigns that focus on those differentiators. Use blogging, social media, relevant keywords, great content, targeted opt-in email newsletters and other inbound marketing techniques to help position your brand as an authority on those differentiators.

An example: Whole Foods Market has prices that are consistently and significantly higher than competitors such as Kroger. During the recession, Whole Foods could have chosen to drop its prices to be competitive, but instead, it focused on its differentiators: high-quality organic products, environmental sustainability/animal welfare, healthy eating and community service. It created useful articles and blog posts featuring healthy recipes, gardening tips, organic “beauty hacks, and more. Its podcast, YouTube channel, frequent in-store events and signage all put the focus on these differentiators rather than on price.

Instead of seeing grocery shopping as an apples-to-apples (no pun intended) decision based solely on price, consumers began to think of the overall shopping experience and many of those consumers determined that shopping at Whole Foods was worth the extra spend. Your brand can follow suit by putting the attention on your differentiators rather than your price.

Whole Foods Market consistently and clearly promotes its differentiators through in-store signage and events.
Photos (left to right) by Joanne Wan, Dale Chumbley and Paul Swansen (Creative Commons)

Pro tip: Know your customers well enough to know which differentiators will matter to them and which ones won’t. If I’m selling magazine ads, for example, I start by asking questions to find out who the client is targeting and what their goals are. I could talk all day about how a particular magazine can reach high-income males of a certain age, but if the client is trying to reach women, that’s not a draw. That goes for any kind of differentiator for sales. If Whole Foods had maintained its higher prices and had customers who didn’t care about environmentalism, their approach would’ve fallen flat.

4. Add value instead of dropping prices.

In the end, it is less expensive to retain an existing customer than it is to earn a new one, so there are times when discounting could make sense for your business. Every situation is different and only you can determine what’s right for your brand, but following these tips will get you on the right track toward making smart discounting decisions.

What is your discounting strategy and has it worked well for you? Let us know!