TL;DR
- You should understand that discount pricing, while effective for quick sales boosts, isn't a one-size-fits-all strategy and can sometimes harm long-term customer loyalty.
- Exploring various discount types, like volume and seasonal discounts, can help tailor your approach to different customer needs and occasions.
- The advantages of discount pricing include closing deals faster and encouraging repeat purchases, but beware of the downsides like hesitancy to pay full price later and potential damage to your brand's perception.
- Integrating discount pricing with other pricing strategies can mitigate some risks and improve customer acquisition.
- Ultimately, relying less on discounts and focusing on value addition and market segmentation can lead to better customer retention and brand value.
- Togai is a pricing implementation platform that allows rapid strategy adjustments in less than a day.
We all love a good discount, don't we? It's that delightful feeling of scoring a great deal that puts a smile on our faces. However, here's the thing: while offering discounts can make customers happy with their purchases, it's not necessarily the ideal strategy for every type of business when it comes to acquiring new customers. In fact, using unnecessary discounts can sometimes backfire and hinder the cultivation of loyal customer relationships. It's important to strike the right balance and prioritize long-term customer loyalty.
To understand this, you need to get down to the basics of discount pricing. Let’s start with the discount pricing definition.
Discount Pricing: Exploring the Definition & Its Types
Discount pricing is basically a promotional pricing strategy where you reduce the original price of your offerings for the below reasons:
- Get inventory moving
- Drive sales
- Increase customer traffic
A sense of urgency is created among customers, which leads to conversions.
Discount pricing is effectively used in the e-commerce and retail spaces. For instance, e-commerce businesses offer discounts and promotions on a wide range of items to attract more customers and increase sales volume. Likewise, SaaS companies can offer discount promos for their online tools to garner more customers.
The choice of a discount pricing technique depends on various factors such as your industry, overall business strategy, objectives, and products. Different techniques exist, all aimed at reducing a percentage of the original market price. To determine the best approach for your business, it's essential to consider these specific factors. Let us now take a look at some of the common discount types
Discount Pricing & its types
- Volume discount pricing, encourages customers to buy goods in large quantities. One of the popular forms of volume discount pricing is bundling.
- Clearance discounts indicate that the products are available at extremely attractive discounts like Buy One Get One, Buy Three Get Two, and such offers that are available for a limited period.
- Loyalty discounts are offered exclusively to long-term customers to recognize and reward their brand loyalty and consistency.
- Seasonal discounts are what businesses offer during particular seasons like Christmas or Thanksgiving.
Here’s the simplest way to calculate the discount price.
5 Steps to Calculate Discount Prices
Step 1: Find out the original price.
Step 2: Determine the discount percentage (discount/100)
Step 3: Calculate the savings. (Multiply the original price with the discount percentage).
Step 5: Subtract the savings from the original price to get the discount price.
In formula form, it will be:
Discount price = original price - (original price * discount / 100)
Discount pricing is an attractive strategy. However, before implementing it, you must weigh the pros and cons.
Advantages & Disadvantages of Discount Pricing
The advantages
Helps close deals
When businesses have potential deals that are on the verge of being lost, you can offer customer discounts to increase sales and save the deal. Here’s a word of caution: You should not rely on discount pricing to drive all your sales efforts.
Reduces activation energy
When you give discounts, customers can quickly arrive at a decision to buy your product instead of thinking too hard about buying it or not. Discounts reduce the activation energy for the customer by allowing them to try the product until they are ready to commit.
Encourages repeated purchases
By providing a discounted rate on your product or service, you can capture the attention of potential buyers who may not have discovered your offering otherwise. This initial exposure can lead to increased interest and a higher likelihood of purchase. Even after you discontinue the discount, it can still motivate customers to make a purchase due to the initial incentive they received.
The disadvantages
Hesitancy to pay
Customers who initially join with a discount tend to have a lower willingness to pay compared to those who didn't receive a discount. Offering a discount right from the start can make upselling them on additional products or services more challenging. Their perception of value may be anchored to the discounted price, making it harder to convince them of the benefits of higher-priced offerings.
Higher customer churn
Customers who have received a discount tend to have a significantly higher churn rate compared to those who didn't receive a discount. This means that offering discounts may actually shorten the average customer lifecycle. While discounts can be effective in attracting customers initially, it's important to consider the potential impact on customer retention.
Warp band perception
Consistently offering significant discounts on products or services carries the risk of positioning your brand as a "bargain brand." This can create a perception of cheapness or being of lower quality. Customers may associate your brand with always seeking the lowest price rather than focusing on the value or unique aspects of your offerings. Such a perception will badly dent your brand image and sales.
Pairing Pricing Strategies With Discount Pricing: 7 Ways to Do It
At this juncture, it is important to understand that not all discount strategies are equal.
Whether you are a SaaS or a subscription-based business, each strategy will have various implications in terms of customer acquisition and sales.
Hence it is important to pair a good pricing model with effective discounts to make it work in your favor. If you plan to use discount pricing as a tool to increase sales and customer numbers, here are some pricing strategies to consider.
- Offer discount percentages or free trial periods for new customers.
- Create a sense of urgency by fixing a limit or expiration dates for your promotions.
- Ensure you are offering competitive discounts before launching your offers.
- Collaborate with a popular brand to bundle your promotions.
- Offer discounts for highly-priced products that all consumers cannot afford to buy during the regular season.
- Reward loyalty programs in the form of discounts to attract new customers who will enjoy the benefits for a longer period.
Discount Pricing is a Short-Term Strategy: Why?
This statement holds especially for SaaS businesses because there are more drawbacks than benefits. It cannot be a long-term solution because it will only lead to:
- Lower profit margin
- Unpredictable growth
- Higher customer churn rate
- Lesser willingness to pay
Also, when you discount a product, it negatively impacts its perceived value. It will result in customers hesitating to buy your product if they feel your product’s value is low.
So, How to Rely Less on Discounts?
Discount pricing is not the ultimate solution to push sales. Three effective ways work better to make your offerings more appealing to customers.
1. Create an entry-level tier with a value metric. This will make your customers notice your main product, and you can also bring in customers with a lower willingness to pay.
2. Add value to your discount promotions by offering more units, such as user seats or premium services. Such discounts have a positive impact that lasts for a long.
3. Improve marketing segmentation by understanding your product’s trigger features and customer value propositions.
Let’s Conclude
Discounts are great, but it's best not to keep them as your core strategy since they have poor customer retention rates. It should be used with discretion to lower the activation energy of a customer signing up for a product. The right discounting strategy can effectively boost sales and membership growth.
Togai is a pricing implementation platform that allows you to implement pricing strategies ten times faster in less than a day. Would you like to know more? Schedule a free demo today!
