When competition is stiff or times are tough, and businesses experience a slump in sales, the natural response of business owners is to reduce their prices. In response to this, they find their competition starts to do the same, and before you know it, you are in a price war.
Price wars are like trench warfare. You may gain a few meters in territory here, whilst the other side gains a few meters from you around your flank. And both sides incur large losses. In this type of battle, it is a war of attrition, and the last person standing wins while bleeding red ink. They also inherit a decimated market landscape with their buyers educated to expect discounts.
A number of negative impacts occur to your business when you discount. The most obvious one is the loss in margin, which you hope to make up with increased sales. In most cases, this does not happen.
The next problem that may occur is that you get a reputation as a discounter, with potential customers waiting for your sales times, particularly if they are seasonal. (I like to buy a new car when dealers are trying to get rid of their last year models from their stock. Major savings are to be had at such times and they are much more willing to negotiate.)
Discounting may also confuse your message to your best buyers, especially if you are attempting to appeal to an up market clientele who are price insensitive. An example of this is the upmarket department store David Jones who when they want to shift old stock, they somewhat snootily declare “As you know David Jones do not have sales, but next month is our annual clearance.” Clearly they do not want to be known to their up market clientele as discounters, but they still want to move their old stock.
Finally, after you finish discounting, how do you lift your prices again? If someone comes in after your sale has finished, and asks you to give him the same 25% discount offer this week as you had last week, it is hard to justify a negative response unless…. you have a clear reason for the sale in the first place. In the case of car dealers, it is to make way for the new model, even if the only difference is a cosmetic facelift. For retailers, it is selling off the last of their summer range before winter.
So if you are discounting, you must have a reason other rather than you are not making as much money as you used to. The reason must be transparent and short term so as not to damage your relationship with your best buyers. Your discounting may indeed attract more buyers, but many may be price shoppers who will not stay loyal to you when your prices do eventually return to normal. These people will be off finding bargains elsewhere, and in the meantime you may have damaged your brand in the eyes of your best buyers.
Most people lose money when they discount. Learn How to Discount Your Way to Higher Profits, by subscribing to The Small Business Achiever. Also in this month’s issue:
- How to Track Your Profits So You Can Drive Them Higher
- Which Online Directories should You Use to Boost Your Google Rankings?
The Small Business Achiever – Business Owner Brief is Your Shortcut to Success and Your Unfair Business Advantage.
May Your Business Be – As You Plan It!
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Dr Greg Chapman is the Director of Empower Business Solutions and The Australian Business Coaching Club and is Australia's Leading Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems. He is also the author of The Five Pillars of Guaranteed Business Success.