In the following post, D’Amore-McKim School of Business Senior Academic Specialist Frederick Crane outlines the details that small business owners should consider when it comes to discounting their products or services.
Small businesses have to really do a careful analysis as to whether or not to engage in discounting, examining the targets of the discounting, the timing of the discounting, the value of the discounts, and the impact on short and long-term profitability. And, unlike large businesses, the small business has a lot less room for error as well as having less margin play.
Personally, I’m not a big fan of discounting in general for a few reasons:
- One, often the discount overpowers the value of the product or service, and once removed, you tend to lose those customers who were motivated to buy only because of the discount.
- Two, in many cases, the people using the discounts are current customers, not new ones, and thus you are now losing margin on sales that you really did not have to lose. So, never use discounting to reward customers if those customers would ordinarily pay full freight in the first place. This is a fatal mistake.
- Three, the continual use of discounting can perceptually cheapen the nature of your products and services. I would urge small business to be independent from price and discounting as much as possible and compete more on some other value-added dimensions desired by customers, like excellent service.
If a small business is going to consider discounting, they must consider the objectives to be achieved by the discounting. For example, perhaps the objective is to attract new customers by inducing trial. If so, then the small business has to limit the discounting to new customers only. If the objective is to move inventory during a slower sales period, then the discounting has to be timed correctly and with a tight termination time frame.
Importantly, small businesses also need to use analytics to determine the impact of the discounting on profitability.
In short, determine the right deal; the specific target customer; the timing, duration, and value of the deal; and the cost of the deal; and then project the impact in terms of moving the sales needle and take a hard look at the return on investment. If the numbers do not make sense, consider other options that are more likely to grow the business without having to take a hit on profitability.