As a marketer, I hate offering a discount. As a marketer, I also offer lots of discounts in my promotions. You would be in the same boat. Love it or hate it, we cannot avoid offering discounts.
Why do I hate discounts? It’s because offering discounts undermine my brainpower. Anyone can offer discounts, even a monkey can. Offering discounts also mean the likelihood that there is no brand investment in a product. That’s why we have to compete on prices.
I also use a lot of discount promotions. The main reason is that I need to get quick results. It’s kind of sad because it’s like I don’t do my job as a marketer properly. You don’t, unfortunately, have a lot of choices especially if you work in a sales-driven or direct marketing environment.
As we cannot avoid offering discounts, let’s discuss how to do it right so it doesn’t hurt our ego much. I will cover how pricing works in relation to demands, what mistakes to avoid when offering discounts, how to do discounts right, and the rule of 100.
Let’s dig in.
Price elasticity of demand
I want to start with an economic concept that explains about prices. Price elasticity of demand (PED) is a way to measure the sensitivity of a change in price when a quantity demanded change. The formula is simple – % change in quantity divided by % change in price.
There are 3 possible outcomes:
- Elastic – if the change in quantity is greater than the change in price
- Unitary – if the change in a quantity equal to the change in price
- Inelastic – if the change in quantity is less than the change in price
The interesting part that could apply in the marketing world is that most of the goods out there are price elastic, meaning when the price drops, the quantity demanded increases. There are a few important points to note here:
- If it’s easy for your customers to substitute your product with another (e.g. substitute products or lots of offers from competitors) when you increase your price the demand will drop. This is because customers simply buy from your competitors or buy a substitute product.
- The more discretionary a purchase is, the more its quantity will fall in response to price rises.
- The less discretionary a good is, the less its quantity demanded will fall. It means the price is inelastic i.e. customers agree to pay premium prices for brand named items, additive products (e.g. alcohol, cigarette), and required add-on products (e.g. iPhones to use iTunes).
From an economic perspective, to get out of the discounting game, we have to find a way to move our product’s price from being elastic to be inelastic. Building a brand is one way. Making your product additive is another.
How to do a discount right
OK, you decide to do a discounting promotion. What is the best approach to do it? I have some tips for you to consider.
- A discount shouldn’t come as a surprise. You should set a clear expectation to your customers when the discount will happen and what the threshold is.
- You should look after your existing customers first. You spend a lot of times and money to get them in the first place. The worst thing that could happen is they are upset and stop recommending your product.
- You have a good reason or a justification to offer a discount. End of year discount makes sense. Closing down sale that lasts for 6 months does not.
- Your discount campaign should be simple and straight forward. It’s a one number e.g. 20% OFF campaign.
- You should educate your customers what a discount threshold is. Apple never offers a discount of more than 10%, for example.
As you can see, to do the discount right, it requires a lot of planning ahead. Don’t do it like I did. I had to offer discounts all the time. When I tried to change, it’s so hard as I created a norm so no one bought our offers at the normal prices anymore. The damage was severe to the point that I had to come up with a new offer entirely.
The rule of 100
As I mentioned earlier, discounting doesn’t require much of brain work. But, we all have to do it so let add some intelligence behind it. There are 2 ways to offer discounts – absolute (or numerical) discounts or relative (or percentage) discounts. Which way is working better than which? The rule of 100 is your answer.
Researchers find that whether a discount seems larger as money or percentage off depends on the original price.
- If the prices are lower than $100, the percentage discounts (e.g. 10% off) will seem larger.
- If the prices are higher than $100, the numerical discounts (e.g. $100 off) will seem larger.
The 3 mistakes to avoid when offering a discount
When you are sucked into a discount game, it’s very, very hard to get out. I used to work in the hospitality industry. You can imagine how hard to compete in a world that is driven by Online Travel Agents (OTAs). It’s like you go to a shopping mall and every shop offers a discount. So you have to do it too.
Let break down the expectation of what you want to see when you offer a discount. We want to see 2 psychological effects:
- We want to create urgency. It’s no point to do a discount if customers don’t feel they have to do something about it NOW.
- We expect the FOMO effect. It’s Fear Of Missing Out, which also leads to point 1 – you want your customers to do something NOW.
If you want to achieve the above effects, you have to avoid the 3 mistakes below.
Mistake 1 – Offering a confusing discount policy
I used to do that too as I expected to get a double hit effect. No, it didn’t work. Go out with one number. If it is 20% OFF, then that is your discount policy with this campaign. Don’t offer something like – buy this product now and get 20% OFF and you will get the second item at 40% OFF. Customers don’t like to think.
Mistake 2 – Discounting very often
You create bad behaviour by offering discounts all the time. I did that too when I was desperate. And, trust me, it’s very had to get back to the normal price.
Mistake 3 – Making your existing customer feel bad
As mentioned above, nothing is worse than a feeling that you are cheated and you paid overprice. Your existing customers should be the ones you protect because you spent a lot of money to get them in the first place. If they feel bad about your pricing policy, it’s unlikely that they would recommend your product to their friends.
A discount game is like a war on drug – very hard to win. I really admire Apple. They seldomly offer discounts. So, when they do, people take action because people know it’s rare. Reaching to the level field that Apple plays is tough. But, we should put some science behind our discount strategy.