Discounts have become a way of life in the American marketplace. You can’t drive down the street without seeing a sign in a retailer’s window blaring, “50% off!” Coupons arrive in your inbox offering discounts for every occasion – even National Cheese Day.
If you’re a business owner, long-standing customers might have asked for a reduction to your goods or services to reward their loyalty. While you might be inclined to say “yes,” think about the pros and cons of discounts first.
Pros of Offering a Discount
How could offering a discount help your business?
Increase Sales
If sales have been lagging, try a sale. It works in retail and the business world. Perhaps a client has been waiting to kick off a big project until more budget came free, but a sale would put your services right in their range. Or customers love to head to the back of the store to the sale rack.
A sale sign, flyer, or email, increases your bottom line. Just be aware of your margins and never discount below cost.
Capture new business
If you’re competing for a new contract that represents significant value to your business, discounting your quote could help you beat out the competition. Be careful of this tactic, however. The risk is that the customer hops around from you to your competitor in search of the best deal.
Listen to your gut when talking to them and putting together your quote, and have your accounting department calculate their potential long-term value, before discounting. And don’t cut below a reasonable profit margin.
Build a New Business Line
Bundling discounts, where the client receives a discount if they bundle products or services, can be a great way to grow a new business line. Let’s say you run a graphic design firm and recently added website design to your services. Offer existing customers a discount if they bundled their current services, such as ad copy and design, with the new service.
This exposes your customers to new offerings, giving you a chance to shine, and reduces their risk when trying you for something else.
Dispose of Older Inventory
Product-based businesses may find themselves with a few odds and ends from last season sitting on the shelves. Discounts can be a great way to move them out the door but also build customer loyalty.
Keeps Valuable Employees Busy
If you pay your employees on an hourly basis and they’re not getting enough work, they’ll go elsewhere. People need to eat, after all. This could leave you short-handed, however, when work does come in.
The last thing you want is to have to turn down a great opportunity because you don’t have the employees to perform the work. Offering a discount to bring in work during the slow season can keep them on your payroll for when things pick back up.
Cons of Offering a Discount
There are a few downsides of offering discounts, however, which you should take into consideration.
Can Create a Perception of Quality Issue
Continually discounting can lead to reputational damage. Customers may wonder why you can’t keep busy at your standard rates, or if your business is suffering. They could worry that you’re selling subpar products.
You could also bring in so much discounted business that, while your sales jump, your service and quality slips and you lose long-term clients. Think carefully about how much of your business rests upon your reputation and the potential impact discounting could have upon it.
Customers Grow Accustomed to Them
You’ve set your prices for a reason; they cover your costs and produce a reasonable margin to keep you in business. Continually discounting your products and services could ultimately imperil your business. But customers can become dependent upon them.
You may hear phrases like, “Can you give me a discount like last time?” “Oh, the last project cost less.” It’s frustrating for a small business owner trying to run a successful business and support their family. Practice politely explaining that it was a one-time or introductory special. If it’s an important client, be prepared to explain realities such as rising overhead costs.
But avoid offering discounts all the time, and at every occasion, or you essentially train your customer to expect your discounted price as the norm.
Masks Deeper Business Issues
You can’t discount yourself out of poor cash flow management. If you throw something on sale every time you can’t cover a major bill, you have a deeper problem. Work with your accountant to get a better grasp on cash flow management, or identify areas where you could trim business costs. Otherwise, you risk getting into a discounting cycle to stay afloat.
You Must Keep Track
It’s essential to have a robust POS or bookkeeping system to keep track of your inventory and sales. If you’re giving clients discounts, you must keep track of them. This will be important when calculating your net profit, your margin, and when preparing taxes at year-end.
Only Appeal to Price Shoppers
Great customers value quality and service in addition to price. The risk of offering discounts, particularly to capture new business, is that you’ll only attract price shoppers.
These are customers who shop around to get the best price and always go with the lowest price. To keep their business, you’ll always have to go lower than the guy down the street.
Should you Offer a Discount?
Discounts make you think about how they will impact your bottom line, your business goals, and your future relationship with the customer. Always consider them within your business’ wider context, as used effectively, they can help you meet a sales or growth target.