When small businesses are looking to move their sales figures, one of the most common approaches they take is to offer a discount. Here’s a problem, though: Unless you do the prep work, your discounts might end up damaging your brand or cutting into your profits.How do you guarantee that your discount pricing will benefit your business rather than hurt it? You need to set firm objectives and know the different approaches you can take to reach them. More importantly, you need to compute the right metrics to ensure that you reach your goals. This guide will show you how to discount your prices, set the right goals, and the best ways to measure your success—leading to both responsible discounts and profitable sales results.Pros and Cons of Discount Pricing
There are many advantages and disadvantages that come with discounting your products or services. Understand what they are so that you know what to plan for.
1. Pros of Discount Pricing Strategies
Setting discounts on your pricing is a strategy that can drive more sales volume to your business, bring in new customers, and give you more advantages as well, such as:
Make Your Customers Feel Positive About Your Business
One advantage is that discounts make your customers feel good. Research shows that when people receive a coupon or savings offer, they become happier and more relaxed. It could be beneficial in the long run if these positive feelings can be associated with your brand.
Help Customers Choose Your Products Over Competitors
Discounts also make it less likely for people to compare your products with other brands, according to a study from the Max Planck Institute for Tax Law and Public Finance. This can help new customers choose your products over your competitors, giving you a foot in the door.
2. Cons of Discount Pricing Strategies
There are some potential cons to be aware of as well. Be sure to assess the risk before discounting your prices.
Discount Pricing Can Lower Perceived Value
Still, there are downsides to discounting. One of them is that once customers have your product or service, they will think it’s of lower quality. In a double-blind study, consumers who paid full price were more satisfied than those who paid discounted rates. They expected a better experience, and their evaluation adapted to this higher expectation.
Risk of Loosing Profits From Lower Margins
It’s also possible to end up without profiting much, or at all, when you offer discounts. While some of your discounted sales might be from people who wouldn’t have bought, you could also lose some profit margins from customers who were going to buy anyway—even if the product wasn’t discounted.
Because of these challenges, it’s important to know your primary goal when discounting.
Set Your Goals First: Before Discounting Your Prices
Before you pick a discount strategy, make sure you have a primary goal. Your goal will determine the type of discount you offer, how you’ll market it, and which customers you should aim to reach. Here are some of the goals you can aim for:
- Acquire New Customers - You’re offering a discount because you want new customers to be interested in your products or services. With a discount, they can try what you offer with lower risk on their part. Plus, if the discount is a limited time offer, new customers will have a reason to try your products and services now, rather than later.
- Increase Your Sales - Your goal is to sell more units of your product or service, regardless of how many customers buy. This could mean going for volume sales, bundling products with each other, and having customers buy as many items as possible before they check out.
- Gain Repeat Customers - Unlike acquiring new customers, getting repeat buyers requires a different mindset. You’re using the discount to encourage brand loyalty rather than enticing people to try your products. This discount is usually delivered via a loyalty program for current customers—and it works. According to research from Colloquy, a loyalty marketing firm, 55% of people enroll in loyalty programs to get discounts on purchases.
- Get Rid of Old Inventory - Sometimes, you need to run a discount just to clear your old inventory. Perhaps you need to make room for new products, update a product line, or focus on better performing products. Contrary to having a goal for increasing sales, the margins aren’t as important here. What matters is how quickly you get rid of stagnant items that otherwise wouldn't sell.
6 Types of Discount Strategies for Small Businesses
Once you’ve picked a goal for your sale or discount, choose the type of pricing discount that works best with it. Below are some common approaches to discounting. Keep in mind that you don't always have to pick just one type at a time. You can use multiple types of discounts for the same promotional offer.
1. Bundled Discount
For this discount, rather than lowering the selling price of one product or service, you lower the price of a group of items bought together.
In one example, Beardbrand, which creates beard care products, sells discounted bundles of their products. These bundles are different varieties of the same product type—such as beard oil or mustache wax—but are cheaper bought together than when bought individually. Customers can then try different scents of the same product to find the one they like best, or they could change up the scents they use daily.
The bundled sale comes with a few benefits:
- Bundling Increases the Number of Items You Sell - Since you’ll be selling several items within a single order, each sale means more items sold, more revenue per order, and lower costs per order. If you’re looking to increase items sold or revenue, regardless of the margins, the bundled sale is a good option.
- Sell Popular and Less Popular Products Together - Bundles also allow you to sell less popular products with stronger selling products. You can leverage the popularity of your best-selling items by enticing customers to buy it with other items on a discount as they’re making their purchase.
- Customers Get to Try Your Other Products - Some of your products might have been marketed more extensively than others. If your other products are of equal or superior quality as your most popular products, encourage customers to try them by bundling them together. You’ll need to measure the sales of the less popular varieties, to see if they’ll increase after the discount.
However, when planning bundled discounts, you need to carefully study which products will be bundled together. If the products don’t seem relevant to each other, customers might see the bundle as a seller’s ploy.
To implement a bundled discount, look at the items that your customers tend to buy together. Consider also the problem that your strongest selling bundled product is trying to solve. What other items in your inventory are solving similar problems?
2. Prepayment Discount
You can also offer a small discount for people who can pay for the products and services in advance, perhaps months or weeks before they are shipped or received.
Prepayments can help build cash flow, since customers are encouraged to pay earlier. This means that you can use their advanced payments to purchase additional inventory, to buy supplies in bulk (probably at a discount), or make other investments. However, prepayments don’t work with all types of businesses. Only products or services that need recurring payments can benefit from this.
Prepayment discounts are common among software-as-a-service businesses. A service like Dropbox, for example, lets customers select between monthly and annual billing. Those who pay annually get a discount on their total subscription payments.
Physical products can also take advantage of prepayment discounts if they do recurring billing. Ipsy, a retailer that sells subscription boxes of beauty products, gives customers one of their monthly boxes for free if they pay a year in advance.
If your business model can work with prepayments, find out if you can offer discounts. Can your target customers afford to pay a larger amount, most likely via credit card? Do they make advanced payments for other similar products or services? If you find that your customers are willing to pay a discounted lump sum over recurring charges, have a plan for how you're going to reinvest your increased cash flow wisely.
3. Volume Discount
When you offer a volume discount, your customers end up paying less per item as long as they buy a larger amount of that item. For example, Ujido, an online matcha tea provider, offers a 10-percent discount if you buy 8 boxes of their product.
Because you’re enticing customers to buy more units per order, volume discounts are a good option if you’re looking to clear inventory or increase the average value per order.
4. Event/Seasonal Discounts
Event-based discounts tend to happen around a specific date or season, and they are often recurring. This includes discounts that take place during holidays, such as promos for the New Year or Valentine’s Day.
In the example below, Dan’s Chocolates has a “Super Snowman Sale” for December — a month when people tend to send out gifts. These chocolates are intended for gift-giving, which is why the discounts are for large orders shipped to multiple addresses.
When small businesses are looking to move their sales figures, one of the most common approaches they take is to offer a discount.
Here’s a problem, though: Unless you do the prep work, your discounts might end up damaging your brand or cutting into your profits.
How do you guarantee that your discount pricing will benefit your business rather than hurt it?
- You need to set firm objectives and know the different approaches you can take to reach them.
- More importantly, you need to compute the right metrics to ensure that you reach your goals.
This guide will show you how to discount your prices, set the right goals, and the best ways to measure your success—leading to both responsible discounts and profitable sales results.
Pros and Cons of Discount Pricing
There are many advantages and disadvantages that come with discounting your products or services. Understand what they are so that you know what to plan for.
1. Pros of Discount Pricing Strategies
Setting discounts on your pricing is a strategy that can drive more sales volume to your business, bring in new customers, and give you more advantages as well, such as:
Make Your Customers Feel Positive About Your Business
One advantage is that discounts make your customers feel good. Research shows that when people receive a coupon or savings offer, they become happier and more relaxed. It could be beneficial in the long run if these positive feelings can be associated with your brand.
Help Customers Choose Your Products Over Competitors
Discounts also make it less likely for people to compare your products with other brands, according to a study from the Max Planck Institute for Tax Law and Public Finance. This can help new customers choose your products over your competitors, giving you a foot in the door.
2. Cons of Discount Pricing Strategies
There are some potential cons to be aware of as well. Be sure to assess the risk before discounting your prices.
Discount Pricing Can Lower Perceived Value
Still, there are downsides to discounting. One of them is that once customers have your product or service, they will think it’s of lower quality. In a double-blind study, consumers who paid full price were more satisfied than those who paid discounted rates. They expected a better experience, and their evaluation adapted to this higher expectation.
Risk of Loosing Profits From Lower Margins
It’s also possible to end up without profiting much, or at all, when you offer discounts. While some of your discounted sales might be from people who wouldn’t have bought, you could also lose some profit margins from customers who were going to buy anyway—even if the product wasn’t discounted.
Because of these challenges, it’s important to know your primary goal when discounting.
Set Your Goals First: Before Discounting Your Prices
Before you pick a discount strategy, make sure you have a primary goal. Your goal will determine the type of discount you offer, how you’ll market it, and which customers you should aim to reach. Here are some of the goals you can aim for:
- Acquire New Customers - You’re offering a discount because you want new customers to be interested in your products or services. With a discount, they can try what you offer with lower risk on their part. Plus, if the discount is a limited time offer, new customers will have a reason to try your products and services now, rather than later.
- Increase Your Sales - Your goal is to sell more units of your product or service, regardless of how many customers buy. This could mean going for volume sales, bundling products with each other, and having customers buy as many items as possible before they check out.
- Gain Repeat Customers - Unlike acquiring new customers, getting repeat buyers requires a different mindset. You’re using the discount to encourage brand loyalty rather than enticing people to try your products. This discount is usually delivered via a loyalty program for current customers—and it works. According to research from Colloquy, a loyalty marketing firm, 55% of people enroll in loyalty programs to get discounts on purchases.
- Get Rid of Old Inventory - Sometimes, you need to run a discount just to clear your old inventory. Perhaps you need to make room for new products, update a product line, or focus on better performing products. Contrary to having a goal for increasing sales, the margins aren’t as important here. What matters is how quickly you get rid of stagnant items that otherwise wouldn't sell.
6 Types of Discount Strategies for Small Businesses
Once you’ve picked a goal for your sale or discount, choose the type of pricing discount that works best with it. Below are some common approaches to discounting. Keep in mind that you don't always have to pick just one type at a time. You can use multiple types of discounts for the same promotional offer.
1. Bundled Discount
For this discount, rather than lowering the selling price of one product or service, you lower the price of a group of items bought together.
In one example, Beardbrand, which creates beard care products, sells discounted bundles of their products. These bundles are different varieties of the same product type—such as beard oil or mustache wax—but are cheaper bought together than when bought individually. Customers can then try different scents of the same product to find the one they like best, or they could change up the scents they use daily.
The bundled sale comes with a few benefits:
- Bundling Increases the Number of Items You Sell - Since you’ll be selling several items within a single order, each sale means more items sold, more revenue per order, and lower costs per order. If you’re looking to increase items sold or revenue, regardless of the margins, the bundled sale is a good option.
- Sell Popular and Less Popular Products Together - Bundles also allow you to sell less popular products with stronger selling products. You can leverage the popularity of your best-selling items by enticing customers to buy it with other items on a discount as they’re making their purchase.
- Customers Get to Try Your Other Products - Some of your products might have been marketed more extensively than others. If your other products are of equal or superior quality as your most popular products, encourage customers to try them by bundling them together. You’ll need to measure the sales of the less popular varieties, to see if they’ll increase after the discount.
However, when planning bundled discounts, you need to carefully study which products will be bundled together. If the products don’t seem relevant to each other, customers might see the bundle as a seller’s ploy.
To implement a bundled discount, look at the items that your customers tend to buy together. Consider also the problem that your strongest selling bundled product is trying to solve. What other items in your inventory are solving similar problems?
2. Prepayment Discount
You can also offer a small discount for people who can pay for the products and services in advance, perhaps months or weeks before they are shipped or received.
Prepayments can help build cash flow, since customers are encouraged to pay earlier. This means that you can use their advanced payments to purchase additional inventory, to buy supplies in bulk (probably at a discount), or make other investments. However, prepayments don’t work with all types of businesses. Only products or services that need recurring payments can benefit from this.
Prepayment discounts are common among software-as-a-service businesses. A service like Dropbox, for example, lets customers select between monthly and annual billing. Those who pay annually get a discount on their total subscription payments.
Physical products can also take advantage of prepayment discounts if they do recurring billing. Ipsy, a retailer that sells subscription boxes of beauty products, gives customers one of their monthly boxes for free if they pay a year in advance.
If your business model can work with prepayments, find out if you can offer discounts. Can your target customers afford to pay a larger amount, most likely via credit card? Do they make advanced payments for other similar products or services? If you find that your customers are willing to pay a discounted lump sum over recurring charges, have a plan for how you're going to reinvest your increased cash flow wisely.
3. Volume Discount
When you offer a volume discount, your customers end up paying less per item as long as they buy a larger amount of that item. For example, Ujido, an online matcha tea provider, offers a 10-percent discount if you buy 8 boxes of their product.
Because you’re enticing customers to buy more units per order, volume discounts are a good option if you’re looking to clear inventory or increase the average value per order.
4. Event/Seasonal Discounts
Event-based discounts tend to happen around a specific date or season, and they are often recurring. This includes discounts that take place during holidays, such as promos for the New Year or Valentine’s Day.
In the example below, Dan’s Chocolates has a “Super Snowman Sale” for December — a month when people tend to send out gifts. These chocolates are intended for gift-giving, which is why the discounts are for large orders shipped to multiple addresses.
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