As explained in Part 1 of this series, discounting is a legitimate tool if it’s used strategically – not as a ‘run-of the mill’ approach to magically improving your top line.
The two reasons when discounting can be used effectively are:
- To move old or slow moving stock;
- To acquire new customers in certain scenarios (but use with caution!)
In this blog, we’ll unpack these two strategies.
1) To sell old or slow moving stock
Obsolete and slow moving stock are the culprits behind bloated inventory balances. These are the products that have become dated because a newer, shinier version has been launched in the market.
There’s no doubt you have a bunch of older or slower moving stock that’s simply sitting in your warehouse.
A lot of founders we work with are hesitant to write-off or massively discount old stock because they’re anchored to the idea that it’s still worth something in the market.
It’s often left to the ‘too hard basket’ because they’re focused on selling and promoting the newer, sexier stuff.
The reality is your old stock is a real cost to business. It’s taking up valuable warehouse space. It’s collecting dust and devaluing every day.
But most importantly – it’s sucking up your cash flow.
Discounting is an effective tactic to clear the old product in order to make room for new SKUs that sell.
Ideally you would just sell these products at a lower margin, or even at cost.
In this circumstance, discounting is a legitimate tactic.
Consider it a sunk cost.
2) Discounting as a customer acquisition tool
Marketers love to use discounting as a tactic to attract new customers. This is prevalent in discounting campaigns like BFCM, EOFY sales, Boxing day…you name it.
Whilst discounting is a valid customer acquisition tactic, I find it’s rare for managers to do the hard work and actually measure the efficacy of their discounting campaign.
Managers should be asking these questions when designing their discounting campaign:
- What’s the discounting budget we should set to attract this new customer?
- Is this the type of customer we want to attract?
- What is the payback period of this new customer?
The 3rd and final point is the most important.
The common rhetoric for marketers is that discounting is an effective tactic to get a new customer into the door. You may make a small profit, or even a loss to acquire that customer now – but the hope is that they become profitable over their lifetime. This is on the assumption that they become a repeat customer and pay full price for future products!
This is a big assumption – and one that should be tracked and monitored via a cohort analysis to truly understand if they are in fact a profitable customer to you.
Of course, all of this assumes you can get that customer to pay full price in the future.
Discounting sets a price anchor
The main risk of attracting new customers via discounting is that it sets a ‘low’ price anchor at the beginning of a new relationship. Once the bar is set, it’s often challenging to reset the customer’s expectations back to full price.
Your customers have anchored themselves to the discounted price – and anything above that is perceived as ‘expensive’ in their eyes.
Equally, discounting can set a dangerous precedent because this customer becomes trained to only buy your product when it’s on sale.
This can quickly evolve into a vicious cycle of artificially boosting sales by discounting. From a top-line perspective, sure you’re maintaining revenue – but from a financial perspective, you are actually losing money.
Discounting to attract unprofitable customers is like buying friends to make you happy.
Nobody wants to do that.