Weighing up the merits of discounting
Should I discount during an economic downturn?
During an economic downturn many firms panic in order to halt reducing demand and/or stimulate sales. The purists would argue that all this does is destroy brand value.
So when is it right to discount and not to discount? This seemingly straightforward question is much more complex that it first seems and leads to arguably one of the most complex questions in business. To answer the question in detail we need to first understand why price is so important.
Along with Place, Product, Promotion and People, Price is one of the essential five P’s of marketing. A pricing decision is the only one of the five P’s which directly and immediately impacts your bottom line. Price also plays a key role in the buyer purchase decision and is often the difference (especially in tougher times) between buying and not buying.
While there are many approaches to setting price this article reviews the question from a marketing strategy/branding point of view.
The Marketing Approach to Pricing
Like any of the other marketing P’s, pricing must be set in conjunction; and be consistent with; your marketing strategy. To illustrate the point, let’s examine the computer market and Apple versus the PC.
Apart from the visual appeal of an Apple Mac, what was evident was that Apple (normally) charges a premium over a comparable PC with the same specs. What’s more there were no discounts and no special offers – just the price plus the addition of an extra $500-$1,000 in software.
Compare this to buying a PC where PC manufacturers apply discount after discount. For instance, it would not be difficult to purchase three laptop PC’s for a retail venture and discover the cost of those three (after store discount and cashback’s from the manufacturer) would be about the same as the one Mac!
Whereas one doesn’t expect a discount from Apple, we have all been conditioned to expect/demand one from a PC. Which may account for some of the reasons why Apple reported a record first quarter net profit for 2009 – during the economic crisis (with plans to open another 25 stores according to Macworld) while HP recorded a -5% drop in profit.
What this example demonstrates is a company’s positioning plays a significant role in determining its overall pricing strategy and whether discounting is consistent with the strategy.
Deciding Whether to Discount
Most often, the question is not “Should or Shouldn’t I” but rather “Must I or Mustn’t I”? In many cases you may not have a choice as discounting may be part of your normal sales strategy and not being done as a response to the current market, and therefore not necessarily dependant on your positioning.
Examples of this are clearing of old stock, sales cycles of your distribution channels such as department stores requiring discounting at key times during the year, or new entrants into a market employing a “penetration strategy” and deliberately discounting to gain market share.
So if you have a choice, how do you determine whether you should discount? I advocate a “think before doing” philosophy, so the place to logically start your consideration is to look to your marketing strategy and in particular how differentiated you are relative to your competition. Differentiation in reality can be seen as a proxy for the strength of your brand. Typically the stronger your brand the higher price you can charge relative to your competition.
Assess your current positioning to see if a price discount is consistent with that positioning, or necessary depending on your competitors’ pricing strategy.
If you have low differentiation and hence are easily interchangeable in your consumer/clients mind, a price discount is not only consistent but is also an effective tool in driving sales (e.g. PC sales).
In addition, your consumer/clients may well expect or demand a price reduction in “down times,” and you will most likely need to maintain your price position compared to your competitors. However if you experience high levels of differentiation within your consumer/clients mind, reducing your price to increase sales or stimulate demand may be unnecessary and inconsistent with your brand’s positioning.
Warning on Discounting
You should exhaust all other options before resorting to price reductions. Discounting is a little like becoming a drug addict – it might provide you with a kick, the stimulus you are looking for in the short term but beware…..once hooked it’s a mighty hard habit to kick, and you may find like many before you that you’ll need a lot more than a methadone treatment to wean yourself off the habit.
Apple through its strength of a sound positioning (and “cool products”) differentiates its brand and products to the level that the purchase-price decision within their target customer’s mind is far less important than their desire to just “have it”. Here you have a differentiated product and a cost structure that allows you to completely change the way business is conducted.
Reducing your price at this point would simply cause confusion in your consumer/buyers minds. As a successful businessman said to me recently, “sometimes you have to be prepared to say “no” to business if they are demanding a price decrease as it is more important to keep the integrity of the brand”.
In reality, price may be something you may not have complete control over. If you are in an undifferentiated market, you will be forced to follow your competitors otherwise you will be perceived as expensive for your offering. The companies that rise above the competition in these turbulent times are those that successfully differentiate themselves from their competitors.