A recent article in Business Insider, No one pays full price anymore – and it’s terrifying companies, highlighted the perils of discounting. The conclusion of the article was “Consumers just don’t want to pay full price for anything anymore.” While the pricing strategies of most retailers rarely start with discounting, they have trained their customers to wait for discounts, and then buy what they want on sale. The results are lower margins and shrinking profitability. There are pricing lessons to be learned from the pain retailers are experiencing; manufacturers and distributors in B2B markets should heed those lessons. It is dangerous to train your customers to wait for discounts.
Retail markets are very competitive and profit margins are generally low. Some luxury goods companies are exceptions to that generalization, because their pricing strategies revolve around selling the value of exclusiveness, very high quality, and excellent service. Their brand loyalty is very high. On the other end of the spectrum, retailers who rely extensively on discounting find their customers just will not buy without a discount. As a result they are experiencing significantly lower or negative profitability, store closures and in some cases bankruptcy filings.
If retailers start out with good intentions, why do they end up discounting? Usually it starts with trying to clear excess inventory or attempting to hit target sales and profit goals. To hit their goals, the retailers make a trade-off of lower near-term prices to sell more volume. However, they fail to realize the long-term consequences of those choices. As an example, consider auto manufacturers. In the late 1970s, all of the manufacturers offered cash rebates on certain models in order to move the inventory. Customers liked it and the inventory moved. When the manufacturers wanted to sell more cars in the next quarter and year, they offered the rebates again. That began a cycle of dependency that lasted decades. Only the most exclusive brands could be sold without a rebate, and the car companies hemorrhaged losses. In the past 6 years, auto manufacturers have significantly reduced the use of rebates, but they went through some very painful times to accomplish it, including bankruptcies.
In the B2B world, customer surveys consistently show that price, while important, is not the most important factor for customers. Having the right product, product reliability, and service quality are most important to customers. However, if you start discounting or increasing discounts at certain times, you train your customers. Last year I wrote a blog, Year End Discounting – Can You Kick the Habit?, in which I compared discounting to heroin. Customers get used to it, and the manufacturers and distributors who provide it must continue to provide it.
The lesson for companies selling B2B and B2C is simple. If your customers learn that by simply asking for lower prices or waiting for discounts they will be rewarded, your customers will continue to do so. So what do you do when faced with the choice of hitting short-term goals by discounting in exchange for some longer term pain? First, you need to recognize the long-term pain is real. Don’t kid yourself that it will be easy to make it a one-time discount. Second, like Reed Holden says, you need to have backbone. Be clear in your assessment of the value you bring to customers, articulate the value to your customers, and accept some short-term risk to defend that value. Avoid pricing strategies based on taking market share with ever larger discounts, and build your business around customer value. You will have a more stable, healthy and durable business.
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