Crafting effective discount pricing strategies can significantly enhance your sales and inventory management. Discover best practices and avoid common pitfalls for a successful pricing approach.
Discount pricing is a promotional pricing strategy where you reduce the price of a product or service to improve sales. The original price is reduced with the goals of:
- Increasing traffic (foot traffic, website visitor traffic, or both)
- Clearing specific inventory
- Driving sales of specific products
Low prices attract customers. This is particularly true when they are aware of the regular cost of a product. In the realm of pricing psychology, we recognize that offering a discount, even from a steep initial price, is an effective way to boost sales.
How discount pricing works
Customers are inclined towards discounts due to the perception of receiving a favorable offer. The comparison between the discounted price and the original price redirects their attention towards the monetary savings they gained.
In addition, discount pricing strategies create a sense of urgency. Discounts aren’t permanent; they are occasional opportunities for saving. This is why discounts are applied during:
- Holidays
- Clearance sales
- Product-specific sales
- Back-to-school sales
- Flash sales
Discount pricing is also tied to inventory management. You can lower prices for items that are more difficult to sell generally, or which you have too much of. This way, you can reduce waste and ensure you receive at least a marginal profit on troublesome stock.
Likewise, some discount strategies are specifically designed to promote certain customer behaviors. For example, you can offer discounts on cash purchases, or promote specific payment methods.
In any case, discount pricing is an easy way to attract shoppers and clear certain inventory items.
Common discount pricing methods
1. Clearance sales
Retailers often use clearance sales to strategically offload inventory that is not selling well. It is a marketing strategy used to inform customers that products are available at exceptionally affordable prices.
2. Seasonal discounts
The logic of seasonal discounts is similar to clearance sales. Businesses offer seasonal discounts to control their inventories and maintain their margins. Old inventory is best cleared off-season with the help of seasonal discounts.
3. Volume discounts
Businesses aiming to sell a specific product in greater volume utilize discount pricing. The cost per item is reduced when more of a product is bought at once. Retailers can reduce their inventory and sell profitable items at a higher volume.
Appropriate discount pricing: Customer segments
At a strategic level, there are more thorough approaches to discount pricing. Segmenting discounts allows you to make the most out of the discount pricing benefits.
Different customer segments will be attracted to different discount tactics. Each of your customer segments has a different willingness to pay. The willingness will shift based on what discounted prices you offer to each segment. This is where discount pricing can get more complex, but also far more profitable.
We often consult businesses on discount pricing strategy, walking them through the research process. What we’ve noticed is that segmented discounting strategies can maximize the profitability of discounting.
The first step here is customer research. You need a deep understanding of your major customer segments to create a discount pricing strategy that works. Each segment should be linked to a particular price point that demonstrates their willingness to pay.
Strategies to address discount pricing challenges
In addition, while discount pricing is a reliable and simple method, there are some potential challenges. To overcome these challenges, there are a few tactics you must employ.
1. Promotional strategies
Promotional strategies maximize the effectiveness of discounts by connecting the discount information with the right customer segments. You can thus attract the right customers so your discounts lead to the sales you need.
Promotional strategies also minimize revenue erosion. They focus your marketing efforts on the segments that maximize the impact of your discount promotions. When conducted effectively, you fight off the negative effects of having your revenue reduced.
2. Discount effectiveness analysis
Despite conducting thorough research, it is still necessary to evaluate the success of your discount strategy. Every attempt at discount pricing will impact your sales volume, revenue, and profitability.
Measure the effectiveness of your well-researched discount strategy to ensure optimal results. This analysis covers:
- Segmented sales volume analysis
- Price elasticity analysis
- Customer behavior analysis
- Competitive analysis
Sales training
Discount pricing strategies require a different sales approach to achieve maximum effectiveness. We recommend value-based pricing strategies alongside value-selling as a sales tactic.
It is important to train your sales teams to minimize their dependence on discounts during negotiations. We help companies with their sales negotiation strategies by helping them build a value-based selling mindset.
While discount pricing can be effective, it's not always the best approach. Overusing discounts can erode brand value and train customers to wait for sales before buying. It's important to use discounts strategically and consider alternative marketing tactics.
With a decades-spanning legacy, Simon-Kucher has long been synonymous with pricing. We defined the discipline, and it’s ingrained in our DNA.
We take great pride in our scientific, analytical, and data-driven competencies, which allow us to significantly impact our clients. Regardless of your business sector, we have the expertise to enhance your pricing, driving sales, profit, and satisfied customers.
Our experts are always happy to discuss your issue. If you want to know more about our approach to discount pricing, reach out, and we will connect you with a team member.
Contact us to discover the most effective pricing strategy for your needs, and our growth specialist will assist you.
