Why Discounts are a Costly Sales Strategy

Discounts are a common and popular marketing strategy. But are there hidden costs that are reducing margin and damaging your brand reputation? Here's why you should reconsider discounts and what you could do instead.

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For many DTC eCommerce brands, discounts seem like a sure-win sales strategy to boost sales and attract more traffic to their online stores. After all, who doesn’t love saving money through discounts, especially on expensive items? And, as brands scramble to compete in the new pandemic-driven eCommerce marketplace, discounts as a sales strategy have become even more popular.

On the surface, discounting might seem like an easy way to convert customers, but it is rarely the best way. The harsh truth is that a poorly planned sales strategy can actually drain a brand’s profit margins and tarnish its reputation. In the long run, discounts can actually cost a brand more than what they earn. Unfortunately, many brands offer discounts without considering the long-term impacts on sales and public perception.

What Is Discount Pricing?

Discount pricing is a promotional sales strategy that temporarily decreases the price of products or services for a specific period of time. The primary goal of discounting is to increase traffic, move inventory and drive sales and conversions. Discounting also creates a sense of urgency that might drive more customers to convert. 

Discounts are not all bad. A well-conceived and executed discount sales strategy offers DTC eCommerce brands many benefits, including:

  • Clearing out inventory
  • Increasing website traffic
  • Driving fast sales
  • Meeting sales goals
  • Attracting new customers
  • Leveraging seasonal holidays and events

Why Discounting Is Bad for Business

While discounting can lead to an increase in short-term sales, in the long run it can hurt a company more than it helps. Here are four ways a discount sales strategy is more costly than you think:

1. Profit Margins Take a Hit: Few sales strategies compromise profit margins and total revenue more than constant discounting. It works like this: A 10% discount means 50% more units must be sold to earn the same profit dollar. Think 10 units instead of five. If a product has a profit margin of 30% and a brand gives a 10% discount to make the sale, one-third of the available profit is lost. A 50% discount means a brand must sell twice as much to reach revenue goals.

2. Puts the Focus On Price: A discount sales strategy puts the focus on product pricing rather than all the other great things a brand has to offer. Discounts create the perception that the best thing about a company is its low prices. This perception attracts the type of customers who shop solely for bargains without much thought about brand loyalty or product quality. 

3. Cheapens a Brand’s Products and Image: Discounting reduces the perceived value of a brand’s products or services, and by extension, the brand itself. Shoppers associate frequent or heavy discounting with poor-quality or out-of-date products, or because the company is doing poorly. Slashing prices also sends a message that a brand’s products are not worth as much as they would normally sell for.

4. Sets a Bad Precedent: A discount sales strategy sets a precedent that may be difficult to overcome. Customers who see a discount the first time are going to expect one the next time. This can result in a sort of eCommerce retail quicksand of endless discounting. It also creates an expectation of future discounting and creates fear that customers will abandon a brand that does not offer discounted prices.

Alternatives to Discounting

There is a reason high-end brands like Louis Vuitton and Rolex rarely offer discounts. They have confidence in their products and their brand reputation. They trust their consumer audience will be willing to pay full price for high quality products. Rather than depending on discounts, these brands rely on tried-and-true sales strategies so they don’t need to play the discount game. Here are just a few of them:

Justify the Price and Emphasize Value

More brands are now practicing price transparency and tell consumers exactly why their products are a certain price. This strategy emphasizes the value and benefits of a product over the price. Brands that educate their customers not only justify the value of the product but of the brand itself. The higher the brand value, the more valuable products and services are seen in the eyes of consumers.

Start a Loyalty Program

Rather than offer constant discounts that attract one-and-done shoppers, more brands are rewarding loyal customers through loyalty programs. While the logistics of loyalty programs can differ, the ultimate goal is to make customers feel like they are part of something special. A well-conceived loyalty program can boost repeat purchases and increase brand loyalty and customer engagement.

Bundle Products

Product bundles are a popular sales strategy tool in eCommerce markets ranging from food and beverage, cosmetics, personal care products and more. In this sales strategy, single products are bundled and sold at a lower price than if they were sold individually. Customers feel like they are getting a deal, even if they ultimately spend a little more in the long run.

Practice Smarter Inventory Management

Brands that consistently run discounts due to excess stock should take a closer look at inventory management. Quite simply, inventory management lets a company determine exactly how much inventory they should have on hand at any given time. This gives better insight into ordering the stock that is needed based on sales patterns. It also ensures a company does not undersell products, eliminating the need for inventory-clearing discounts.

Host Gated or Exclusive eCommerce Events

Brands can segment their customers and target private events to those segments. Pre-sales, product drops and employee-only events create buzz and drive sales. Brands can elect to offer discounts at these events but won’t see as much damage to margin because the sales are limited to a segment of customers, not the general browsing public. These events also give consumers a sense of exclusivity which builds brand loyalty and creates repeat customers.

The Bottom Line

A discount sales strategy can offer brands some benefits. Before deciding to discount, merchants should seriously consider the benefits and draw-backs. Discounts should never be given out blindly or as a regular occurrence. Brands should indicate to their customers that discounts are short-term, and be transparent about why prices suddenly drop. This way, customers will know an eCommerce brand’s pricing is not arbitrary. 

Whether or not brands should engage in discounting will depend on the brand. But by strategically using simple sales strategies, DTC eCommerce brands can get customers to buy while still maintaining healthy profit margins — all without discounting.

At Scalefast, eCommerce is our area of expertise. Our reliable team of specialists can advise your eCommerce business on smart selling strategies that can boost your growth and revenue and put you ahead of the competition. Talk with a Scalefast expert today.

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