The Downside of Discounting
One of the biggest concerns for small business owners is their ability to get paid what they’re worth. In the long term an incorrect pricing strategy will often lead to the business owner being overworked and underpaid without a realistic chance to renegotiate or demand higher prices for their goods and services.
Discounting is a powerful tool to boost sales but it should not be used as a long term strategy because of the detrimental effect on perception, brand image and growth of the business.
Over the years furniture stores have successfully used excessive discounting to shift products using a range of markdowns and favourable payment terms. However, I believe the heavy discounting of furniture has been a poor judgment call in terms of long terms sales because why would you purchase a sofa at full price when you know there are at least six seasonal sales throughout the year. Consumers are savvy enough to know the tactics of the likes of DFS and their perceived value of the product.
The Pontiac “Giveaway”
In 2004, the Pontiac giveaway on the Oprah Show was lauded as a marketing coup. Over ten years later it has proved more buzz than bucks for the company.
The Pontiac stunt illustrates the lengths innovative marketers will go to in order to break through the masses of adverts. 276 audience members of the Oprah show were given a free Pontiac G6 sedan as part of their “wildest dreams” episode. The value of the cars to Pontiac was estimated at nearly seven million dollars equating to fifty ads on primetime television or a 30-second ad on Oprah at approximately $75,000 per shot.
While the audience were certainly happy to be provided with a new car, many marketers felt this blatant product placement made Pontiac look desperate and devalued the car. It’s worth noting the words of marketer Seth Godin “… a low price strategy is the last refuge of a marketer who is out of ideas.”
Research show sales are averaging at thirty per cent below expectations and no amount of incentives are going to shift the G6 sedan. But Pontiac say that Oprah’s target market are women (who they were targeting) and her track record for boosting sales made this the perfect collaboration. After the show, the company reported an increase in website visitation of more than 600 percent compared to the daily average and that local dealers reported an increase in calls inquiring about the car. Oprah had an increase of more than 800 per cent to her website compared to the previous week and was the best all time free publicity for a season premier.
The Pontiac Giveaway is known as Oprah’s ultimate breakthrough stunt and was repeated in 2011 with the Volkswagen 2012 Beetle. It was a major flop compared to the original stunt and received mixed reviews which has seen car manufacturers less keen to replicate this promotional stunt.
The big issue here with discounting, is that this strategy nearly always costs a company money in the long run; often much more than they would turn in profit. In terms of the Oprah Pontiac stunt, the marketing strategy cost the winners up to seven thousand dollars in tax, resulting in even greater negative publicity and many winners having to sell rather than keep their car.
In a recent survey conducted by Corporate Visions, 89% of nearly 400 companies “agreed” or “strongly agreed” that pricing pressure has increased in the last three years. The environment for selling your solutions is hostile and getting worse, despite the easing of the recession.
When we combine this with a perception of “begging” customers to remain loyal, it is clear to see that discounting and vouchers will create additional pricing problems. With companies like Groupon and Wowcher providing exceptional deals it is no wonder that customers love a good discount (and believe me, they are valuable incentives). As a strategy, it can set a bad precedence as it can negatively impact the trigger features and value propositions of your client base.
So remember, discounting and vouching is a short term pricing strategy. Leverage your pricing strategy to ensure you retain long term customer loyalty, retention and price dominance.