In the realm of incentives, many companies find that nothing motivates customers to take action like a price reduction. Everyone likes a deal, and rebates, coupons for dollars or a percentage off, and “buy one get one”-type offers are tried and true. That said, before you jump on the price reduction band wagon, there are some important issues that you need to consider.
- Will you lose money on every sale made at that price? If so, the next question is: are you likely to make enough money on additional products or services that these people will buy once they’re at your store to make the price reduction pay off?
Supermarkets often run “loss leader” sales, knowing you’re likely to buy a lot more than just strawberries once you get in the store. Likewise, Disneyland runs discount offers for Southern California residents during the off season. This fills the park on what would otherwise be slow days, with visitors who will buy plenty of full-priced food and souvenirs while they’re there.
- Can you handle a high response rate? Run the numbers. What would happen if 100 people respond to your offer? How about 1,000 or 100,000? What would that look like? Say, for example, that you’re thinking of running a “buy 2 and get 1 free” offer during an upcoming holiday weekend. Do you have enough product in stock to handle a big response?
- Will the reduced price attract the right people? Your goal is to attract customers who will stick with your business for the long term. What you want to avoid is the “Groupon” phenomena. Many businesses that have advertised on Groupon and similar sites find that they only attract bargain hunters who are just looking for the next deal.
- What impact will the discount have on your existing customers? Will those who purchased at full price be angry that others are now getting the same thing for 30% less?
- Would you be better off targeting your loyal customers instead of the discount hunters? For example, instead of offering a reduced price to just anyone, could you create a referral program that will provide discounts to your loyal customers who refer their friends?
- What will the reduced price do to the perceived value of your product? Will the couple who pays $100 to spend a night at your hotel be willing to pay $200 for the exact same room next time? If the answer is no, will the couple spend enough at the your hotel’s restaurant, bar and gift shop while they’re there to make the offer pay off for you anyway?
- What type of precedent will the price reduction set? Do you want to become known as a “sales and coupons” business?For example, I would never buy a car without a deal, because there’s always a deal. Same with furniture. Just wait for the next holiday, and there will be a sale. Likewise, I’d never pay full price at Bed Bath & Beyond, knowing that by next week another coupon is bound to arrive in the mail.
Then there’s the recent JC Penney debacle. For decades JC Penney was known for their sales. Then a new CEO came in and abandoned the sales and coupons strategy. Sales plummeted as the retailer’s core shoppers, many of whom evidently shopped at JC Penney because of the discounts, took their business elsewhere.
Bottom line: sometimes using a price reduction as an incentive is a great idea, and sometimes it’s not. Before you implement a temporary price reduction, think through all of the ramifications of what the price reduction can mean.