The Dangers of Discounting

Discounting should be the last tactic considered and when it is considered, it should be carefully crafted as part of an overall strategy, not a knee-jerk reaction to get quick sales.  That's a tough position to take, especially when we continually report that this is a frugal economy and consumers are trying to save money.  It's even tougher because I continue to resist the urge to embrace the notion that customers want to engage the brand.  Brand managers want to engage their customers.  I'm not convinced the passion is universal for customers.

Discounting the price of a product or service is an invitation to negatively impact your bottom line.  As soon as you invite a customer to take $5 off their next purchase you have reduced the amount of the sale, with absolutely no guarantee that the customer will buy any more.  If you create a coupon for a product that promotes "Buy Two and save $2", not only have you discounted the product but you have created a pantry loading strategy and it may take you twice as long to get a repeat sale, possibly opening the door for a competitor to begin influencing the next sale.

You may believe that couponing will improve retention.  You may believe you are improving the lifetime value of the customer who just used your coupon.  I do not subscribe to either of these arguments.  They are built on sand, UNLESS you continue to discount and then you perpetually impact your margin and fall into the black hole of discounting.  Using on-going coupon discounts will increase retention but at a lower margin and unless the brand can reduce costs to offset the margin hit, brand profitability will suffer.

If we subscribe to the current thinking that your customers are seeking both value and "engagement," marketing has to look beyond discounting and couponing as a tactic to capture more long-term sales.  How did McDonald's, Burger King, et al, grow sales?  They created value meals.  They created a strategy that raised the average sale.  When we all got fat from eating value meals, they enhanced their menus with new, healthier items that had become popular. 

The Marketing Implications

A discount/coupon strategy can add value to a product or service sale if it is done correctly.

A coupon widely distributed via print or e-mail is a bad tactic because it will erode the brand's value across all segments of your customer base.  It may generate trial with no assurance of repeat business, unless you discount again.

A carefully targeted couponing effort focused on specific products and services that are performing poorly may deliver positive results.  However, understand that there is no assurance of repeat business.  Also, understand that discounting an underperforming product will not improve the performance of the product.  Most products that do not sell, do not sell for a reason and that's why they are often called "dogs."

A couponing strategy can deliver positive results when the coupon is targeted to specific groups and delivered to those groups as a value.  That value can be a reduced price and that can drive positive results.  To be successful, requires a dynamic customer database with each customer's sales history.  That's the Sixth Star.  Once you know what and when your customers are buying your products and services, you have the knowledge to effectively influence the next sale and a targeted direct coupon, via mail, e-mail, on your Internet site, or texting can directly influence the next sale while controlling the margin hit and positioning the next sale.

Be selective.  Find every customer who has not bought your fish tacos and give them an offer to try it.  Find every customer who has not bought your Green Widgets and give them an offer to try it.

This ties into our Sixth Star strategy of Underperforming Customers.  There are always customers who are not buying all your products who should be buying them and those are the customers you want to target because they are the "low-hanging fruit" with the greatest potential for an incremental sale.  It is a good strategy to upsell and cross sell these customers and this is where the direct and targeted Sixth Star strategy will always deliver positive, long-term results.

And for your good customers... reward them with a loyalty initiative that allows you to stay connected and continually say thank you for your business.  Is a loyalty program a form of discounting?  We do not believe it is because it is based on a strategy of SPEND AND EARN; REDEEM AND SAVE.  How the customer saves is up to you and how you want to control your margin. 

By Bart Foreman, CEO

Group3 Marketing