Guest Author: Stevie Carpenter for Sage
If there’s one way to get your customers’ attention, it’s with a discount.
Spicing things up with a discount pricing strategy is almost guaranteed to help you attract new customers, shift overstock, improve loyalty, and drive more sales. One UK report found that 79% of UK consumers who have changed their spending habits due to the economic climate prioritised searching for a discount before making a purchase – and 58% are currently using discount apps.
But discounting is by no means risk-free. A poor discount pricing strategy can leave you with lost profits, devalued products and a lack of recurring customers.
Here are some considerations and best practices you should follow to make your discount strategy a success.
Understanding discount pricing strategy
A discount pricing strategy involves marking down the price of your products by running sales and applying things like coupons, discount codes, and bundles to products. This can be applied in eCommerce and brick-and-mortar stores. It can also be advertised across a variety of channels – from magazine ads and brochures to email and social media.
There are many discount pricing strategies and techniques that you can use. Here are some of the most popular:
Quantity discounts: Offering discounts to customers who make higher volume purchases. The “buy one get one free” discount or “buy three and get the cheapest free” are popular examples.
Seasonal discounts – For example, running an eCommerce spring sale or winter clearance sale.
Location-based discounts – Giving discounts to customers in specific areas (for instance, free shipping within a certain radius).
Loyalty discounts – Offering reward-based discounts, where customers get money off for making repeat purchases or spending over a certain amount.
Factors to consider before a discount pricing strategy
Running a discount strategy is an exciting task when executed carefully. In order to get it right, here are a few things that you need to consider.
1. Cost analysis and margin evaluation
To maintain profitability, you need to calculate your profit margin, markup, and breakeven figures. This will determine how many sales you’ll need to make to be sure that your strategy is financially viable.
On top of this, you need to keep a close eye on your inventory and cash flow to determine the right discount strategy for you.
An accounts payable system unifies and automates finance tasks to help you achieve full financial visibility and control. With the ability to manage inventory, purchases and expenses, cash flow, and more from one location, you can use advanced reporting and cash flow forecasting to make accurate discount strategy decisions.
2. Competitive analysis
56% of respondents in the Customer Loyalty Index 2022 have switched brands or stores because a competitor offered a better deal.
By knowing what your competitors are charging, you can offer discounts to drive more customers your way. You can also keep an eye on when your competitors run discounts and the type of discounts they run to influence your own strategies and stay ahead of the curve.
3. Consumer behaviour
There’s no doubt that discounts trigger purchases. But for a number of reasons, it’s critical to consider consumer behaviour when devising a discount strategy.
If you run too many discounts, your customers may become reliant on them. Instead of becoming loyal customers, they’ll wait until your brand is running a discount before making a purchase.
The result? Plunging sales outside of your discount periods.
Consumer behaviour will also dictate what type of discount strategy will be the most profitable. Everything from the age range and gender of your customers, to the channels they use and the products they buy can influence the type of discount that they’re most responsive to.
How to make the most of your discount pricing strategy
So, you’re ready to get stuck into your discount pricing strategy—but how do you maximise its success?
1. Establish clear rules and conditions
Discount pricing strategies can get messy if you don’t lay down the law.
Failing to establish clear rules and conditions can leave you vulnerable to discount abuse, which can negatively impact your profit margin. It can also lead you to accidentally mislead customers, ruining your reputation and driving down loyalty.
Make sure you clearly dictate how and when discounts can be used. Rules and conditions that you should always specify include:
The number of times a specific discount code can be used: This prevents people from using a code over and over again or sharing it with others without limit.
The minimum spend required for the discount to become valid: Again, this gives you more control over your profit margin and pricing strategy.
The products/services that the discount applies to: You might choose to only run a discount on certain products (for example, on overstock or seasonal products), in which case specifying the valid products is a must.
How long the code is valid: Adding a date of expiry encourages customers to use the code while giving you more control over the length of your discount pricing strategy.
Bundling involves grouping two or more products together and selling them as a single unit at a lower price. Combining two related or complementary products together offers more value to your customers, increasing your chances of purchase.
Upselling involves encouraging customers to spend more by recommending an upgraded or premium version of the intended purchase. Like bundling, you can also recommend enhancements or add-ons.
2. Assess customer satisfaction levels
Customers are not guaranteed to be satisfied, even if they purchased your product at a significant discount. To improve your future discount strategies, collect customer feedback and use it to gauge customer satisfaction (CSAT) levels.
Along with CSAT scores from new customers, collect net promoter scores (NPS) from existing customers to evaluate how your discount strategy has affected customer loyalty.
With all the financial and reputational risks that come with executing a discount pricing strategy, there’s no denying that it’s a game-changer. Capable of increasing brand awareness, loyalty, and sales, there’s a reason why discounts are one of the most used sales techniques in history.
By performing in-depth cost, competitor, and consumer behaviour analysis, you can significantly reduce the pitfalls of running discounts. From there, make the most of your discount pricing strategy by leveraging all of your channels, using bundling and upselling techniques, and creating a sense of urgency.
To find out more about how we promote and drive additional revenue for our merchant partners, book a demo with us today.