Discount madness is back. In the media, we often hear that “discounts are bigger than ever.” And let’s be honest, we automatically expect a sizable price reduction with many products.
Why is this? Because the continuous rebates condition us to think this way.
Companies bombard customers with special offers. Sometimes, customers receive a price reduction without even asking for one. This shows that many companies that were previously cautious in designing their discounts have now forgotten what to do.
Welcome to our article on smarter price reductions and discounts. Whether you're a small business or a corporate giant, this article will revolutionize your approach to pricing in your marketing strategy.
The problem with price reductions
In today's market, the pervasive use of price reductions has become a double-edged sword for businesses. While initially enticing to consumers, this over-reliance on discounts has led to a cycle of expectation and dependency.
Customers now anticipate discounts as a standard part of the purchasing process. This undermines the perceived value of products or services. Furthermore, excessive discounting can erode profit margins and devalue brands in the eyes of consumers, leading to a race to the bottom in terms of pricing.
Companies that resort to frequent discounting risk diluting their brand equity and sacrificing long-term profitability for short-term gains. They routinely use price reductions as a marketing ploy without regard for sustainable pricing strategies.
However, there are several good role models. Companies with a narrow discount strategy typically provide discounts to a specific segment or for particular products/services. A well-known example is IKEA, which follows a very narrow discount strategy.
Instead, the Swedish chain focuses on designing well-thought-out promotions. For example, it advertised a baby bed in a magazine with an integrated pregnancy test. If the test was positive, the expectant mother received a discount on the bed. Here are a few other examples:
Examples of a narrow discount strategy
- Luxury brands. High-end fashion brands like Gucci or Louis Vuitton often employ a narrow discount strategy. They offer discounts only during specific sales events or to loyal customers through exclusive membership programs. This strategy helps maintain the brand's premium image while enticing customers with occasional discounts.
- Subscription services. Companies like Netflix or Spotify may offer discounted or extended subscriptions to new customers or as targeted promotions. However, these discounts are often limited to specific segments, such as students or individuals signing up for a particular bundle or plan.
- Airline industry. Airlines such as Delta or Emirates sometimes offer discounted fares or special promotions. However, these discounts target specific routes, travel dates, or customer segments. For example, airlines may offer discounts to frequent flyers or during off-peak travel times to fill empty seats.
- Technology companies. Companies like Apple or Microsoft occasionally offer discounts on their products. These discounts are usually limited to specific customer groups, such as students, educators, or military personnel. Discounts may be tied to particular products or during seasonal sales events like Black Friday.
- Membership-based retailers. Stores like Costco or Sam's Club offer discounts to their members as part of their subscription-based model. These discounts are exclusive to members and are often applied to a wide range of online stores or online products.
In all these cases, the narrow discount strategy helps companies maintain their pricing integrity while providing incentives for specific customer segments or products/services.
In the automotive industry, car manufacturer Tesla is a textbook example of a “zero-discount strategy.” Elon Musk believes it is essential for the integrity of the Tesla brand that new cars fresh off the conveyor belt are never sold at a reduced price. However, this rule doesn't include vehicles used for test drives or damaged before delivery. According to Musk, justified price reductions are an important component of an effective pricing strategy.
Four key principles for price reductions
As pricing experts, we understand the importance of striking a balance between attracting customers and maintaining healthy profit margins. That's why we advocate for smarter price management practices prioritizing value over arbitrary discounts. In our experience, companies that handle discounts well tend to follow four key principles.
1. A consistent price strategy
The keyword here is integrity. Customers get used to paying a particular price and consider that price fair. When a company starts offering uncontrolled discounts, it can unnerve customers, damaging its brand and image.
This happened to Praktiker, the former German home improvement retailer. When Praktiker stopped its aggressive discount policy one day, its customers left in droves. Continuous discounts gave customers the impression that the normal prices were too high and the "high prices" didn’t offer them better service. It’s clear how the story ended.
Lacking a proper discount strategy can even unsettle competitors, convincing them to participate in what they consider a price war. Such competitive pricing strategies can cause a downward price spiral across an entire industry.
2. No discounts without a quid pro quo
Only offer price reductions when there is a good reason. Only consider deviations from the average customer prices that will generate more value for the company. This could be by buying a wider variety of products or services (cross-selling), increasing their purchase volume, or by being strategically important.
However, it is always important to proceed with caution. For example, many companies grant discounts on services, software, or updates much too high. Some even offer them free of charge. As software and service-based business models become ever more important, these companies are shooting themselves in the foot.
3. Time-restricted promotions are a steering tool
Price promotions shouldn’t be predictable or last forever. If customers know when promotions are likely to be launched, there is a considerable risk of negatively affecting your company's regular business. The aim should always be to use promotions to steer customers.
For businesses where high-capacity utilization rates are crucial for survival, promotions may be a way to proactively increase utilization instead of pursuing customers reactively, often by offering even more significant price reductions. For example, many machinery companies use predictive algorithms. This enables them to estimate shifting supply and demand levels more accurately, reducing the risk of machines standing still.
4. Strict monitoring
Constantly monitor price reductions of any kind. KPIs should match your company’s overall objectives and be evaluated regularly.
In addition to the usual measurement criteria, e.g., revenue growth and profit, you should assess special cross-effects. This includes changes in demand for other products or purchase sequences (e.g., panic buying).
How Simon-Kucher can help
At Simon-Kucher, we specialize in revolutionizing pricing strategies to ensure better price reductions. We meticulously analyze your customer base, sales volume, and competitive landscape to develop customized pricing and discount strategies.
Whether you're facing pressure to lower prices due to competition or seeking to increase sales without sacrificing profit margins, we help you target customers effectively, optimize sales pricing, and unlock new avenues for growth.
With Simon-Kucher, you can confidently navigate the complexities of pricing, ensuring that every price cut aligns seamlessly with your marketing strategy and long-term objectives.
