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DISCOUNTING: It’s Complicated

Things were considerably different ten years ago when Marty opened Widget World. She was the only game in town, and online shopping was still somewhat novel. Since then, a competitor has moved into a nearby shopping center and e-commerce has more than doubled. Marty is under pressure to raise revenue.

Maybe Marty can boost revenue by lowering the prices on her widgets and increasing sales volume. She has several options. Discounting — a temporary price reduction — is a common “revenue management” strategy. She might also consider marking down her widget prices permanently. A customer reward or frequent buyer program is another possibility.

If she opts for discounting, Marty needs to consider some additional points. Frequency is an important one. If Marty discounts her widgets too often, her customers may notice and stop buying between discounts. When that happens, the discount price becomes the normal price because customers are not willing to pay full price. And that could hurt, not help, Marty’s bottom line.

Anticipated response is another point for Marty to ponder. Who will be attracted to a sale on widgets? If Marty’s current customers are the only ones to respond, then nothing has been gained. If the sale brings in new customers and they remain customers, it’s generally a plus. But if new customers only come for the sale and never come back, there’s limited benefit.

If Widget World is not currently profitable, Marty should be reasonably certain that offering discounts will result in a volume of sales that’s high enough to have a positive impact on the bottom line. Otherwise, it may not be worth the gamble.

Online coupons offering deep discounts for short periods have been a disaster for many small businesses. Instead of generating positive buzz, businesses unprepared for the short-term response may suffer from bad reviews on social media. If Marty is considering a “daily deal” type of Internet promotion, she should look at logistics, operations, and inventory to be certain she and her staff can pull it off. Otherwise, there may be too much at stake.