Break the Discounting Cycle

March 7, 2020 - written by James Steadman

Break the Discounting Cycle
Preface
Reading Time: 5 minutes Discounting has become a pervasive part of sales promotions and marketing strategies. It's an easy way to increase sales but erodes profit margins and brand equity. Read on to learn why discounting should be avoided and how your business can implement value-added marketing methods instead.


March 7, 2020

Author
James Steadman
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Reading Time: 5 minutes

Premise

Discounting has become a pervasive part of most businesses sales promotions and marketing strategies. Discounting is an easy way to increase sales but creates problems with profit margins and brand equity over the long term.

Considering an alternate approach of value-added marketing can maintain or even increase profit margins, build brand equity, while also providing unique sales and marketing opportunities. Read on to learn why discounting should be avoided and how your business can implement value-added marketing methods instead.

Terms

  • Discounting
  • Value-added marketing
  • Profit margin
  • Brand equity
  • Loss-leader campaign
  • Adaptive pricing
  • Versioning

Problems with discounting

There are two main issues with discounting:

  1. Discounting reduces profit margins
  2. Discounting erodes brand equity

Together, these issues create a situation where:

  • your customers increasingly rely on discounts to make purchasing decisions, rather than on the strengths of what you're selling;
  • the preference of your business over a competitors can easily be lost over price, bypassing other competitive advantages you may have achieved;
  • you need to sell far more in order to make the same amount of profit, had you not discounted. An especially troubling situation for service businesses, where scaling is often costly and time intensive - not to mention that slips in service or deliverable quality due to increased workloads can also add knock-on negative effects which further hamstring success.

It's important to state that profits are the fuel upon which businesses grow - not revenue. And, for the vast majority of businesses, profits are directly derived from profitable sales.

Why businesses discount

Clearly, avoiding the problems raised through discounting is important if you want to run a business that's profitable. And there are ways to avoid them as I explain shortly - so why do businesses continue to discount?

Why risk any of these situations at all?

The short answer is because discounting is easy and it's familiar.

  • Discounting is easy. It's simple to quickly whip up an ad, print out some posters, or whack on a few stickers saying everything is 25% off. There are templates available, ready-made promotional tools all available on-demand catering to the X% off needs of businesses.
  • Discounting is familiar. Everyone knows how a discount works, making it simple for staff and customers to understand. There's no deep thought involved with running a discounting promotion, an exception being loss-leader campaigns. Add to this that discounting is so ingrained and normalised in modern marketing that many business owners just assume it's a necessary cost of doing business. What's familiar becomes repeated.

When considered in this light, it seems crazy that anyone would regularly run discounting promotions. But when business owners don't know of any viable alternatives, the decision to discount then seems much more reasonable. A case of "better the devil you know than the devil you don't", it would seem.

An alternative to discounting: value-added marketing

A simple alternative to discounting which is available to any business is to use value-added marketing.

Value-added marketing is where you exceed customer expectations and give them more for making a purchase. Doing this increases the attractiveness of the thing you sell when compared to a similar competitors offer.

Value-added marketing works in several ways:

  1. Adding extras upon purchase increases the perceived value of an offering in the eyes of your customer. This means you can still trigger the feelings of "getting a bargain" because of the extras they got for free.
  2. You can maintain or even increase profit margins by selecting extras which cost you less than the price of a previous discount or by selecting extras which cost you nothing to provide.
  3. Adding extras provides a level of differentiation to your offerings making it harder for consumers to directly compare you with competitors. In this way, carefully selected bonuses which compliment the original offering can also work to change a customer's buying criteria.
  4. Adding extras can be an excellent way to introduce customers to other products or services your business sells. You also benefit by 'piggybacking' onto the marketing costs of the original offering, effectively making it "free" to acquire a new lead for these value-added extras.
  5. You're less likely to destroy brand equity when adding bonuses to your offerings and instead more likely to build brand equity as customers try more of your products and services, find they work as intended, and entrench themselves within your business 'ecosystem'.

How to use value-added marketing in your business instead of discounting

Any business in any industry of any size can start using value-added marketing to help increase sales - the 'hard' part often lies in what extras to give your customers. This bundling of the main item you sell alongside extras is called the 'offer'.

Here are some common steps in starting the value-added marketing process:

  1. Market research. Like all good marketing, you should start with the customer to identify their motivations and frustrations. Customer journey maps, customer experience maps, and buyer personas are all invaluable here. They give you a clear indication of your greatest opportunities to exceed expectations and provide real solutions to customer problems.
  2. Offer mapping. List out all the products and services you sell. Select those which compliment your original offering in some way AND those which cost less to provide than a typical discount would. Reference your market research to see whether the selected extras solve related problems or bring related benefits to your customer. Bundling complementary items together can create an offer your customers will perceive as more valuable than if the individual items were sold alone.
  3. Adaptive pricing. Consider how you can 'break up' the initial product or service you're selling based on it's attributes to offer customers different versions. Called 'versioning' this is a common method of adaptive pricing which allows your customers to choose the best value offering for their needs. This also protects your brand equity and is an easy way to test new market offers.
  4. Universal extras. Consider 'universal' extras - those which can be added to any product or service you sell. Free shipping; free returns 24/7 support; on-time guarantees; and so on are all examples of 'universal' extras which can be added easily and help create more attractive offers for your business. Again, reference your market research to see whether there are opportunities to create unique universal extras which can exceed a customer's expectations.

Combining all these elements allows you to create more attractive offers than a single product with a discount. And, at the same time, protects your profit margins and builds your reputation in the market.

Creating offers that stand-out isn't easy, especially in established markets and those with lots of competition. This is why your offers need to be evaluated often with tests conducted at least half-yearly to see whether they're working as well as possible.

Additional resources

Article: (1993) 100 Ways to Prosper: Understanding the Relationship Between Price Changes and Sales

Need help creating value-added marketing offers?

If you want to use value-added marketing in your business and break the discounting cycle, JC Steadman Marketing can help. Over the past 10 years, we've created stand-out offers which help increase profit margins, increase conversions, and increase brand awareness.

This means happier customers because they're getting more than what they expected, alongside happier business owners because they're selling more and keeping more of the revenue too.

If you'd like to see if we can help, apply for a free 15-minute Evaluation Call today:

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It's free and there's no obligation to use our services afterwards.

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James Steadman

James Steadman is the director of JC Steadman Marketing and helps companies solve their business problems using psychographic direct response marketing methods.

Over the past 10 years, he's provided direct response marketing and sales services for hundreds of companies around the world, including some of Australia's largest brands within the financial and real estate industries.
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