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The dangers of discounting in a downturn


Have you noticed the number of businesses that are discounting their products and services lately? It’s like the Boxing Day sales never ended. Internet providers are offering cheap rates on broadband, retailers are promoting sales, pay TV companies are offering introductory rates, travel agents are advertising cheap holidays and mechanics are offering service discounts. Everywhere you turn, there’s a product being discounted.

Discounting impacts perceived quality

It might seem logical to discount during an economic downturn. You need to boost sales and attract new customers. And customers are tightening their belts and shopping around for the best price. But is discounting the best option over the long-term?

During tough times, people like bargains but they also rely on quality and certainty. Price is an indication of quality. When price is discounted, there’s a perception that the quality of the product is affected.

Customers searching for quality will choose the product or service that is a higher price. This is especially the case for luxury goods, which should never be discounted. There’s also not much point discounting in a market that has little competition.

Don’t count on discount

Discounting might help to boost sales and attract new customers in the short-term, but from a strategic perspective it can have a negative impact on your brand. It’s important to consider the potential consequences of a discounting program:

  • Discounting creates an expectation for cheap products and services.
  • Discounting encourages customers to wait for discounts before making a purchase.
  • Discounting creates a price war by forcing competitors to discount as well.
  • Discounting cuts profit margins.
  • It can be difficult to raise your prices when the economy recovers.

So instead of rushing into a discounting program, consider what other options are available to you. For example, bonus offers add value to the existing product rather than take value away. Last year, Holden announced that it would cap the price of petrol and diesel at 99 cents for all private customers who bought a new Holden for a certain period of time. It was a great example of how to make tough times a little easier for customers without discounting the product.

Discounting and sales promotion can be a valuable marketing tool when used correctly. But when used solely to increase sales it can devalue the brand. Remember, price is anchored to perceived value. Discounting the price, could discount your brand.

Renee Hancock is a marketing and communications specialist whose experience spans finance, government, education, not-for-profit, telecommunications and law. She has consulted for two of Australia’s most prestigious public relations agencies and now works in-house for a leading financial services organisation.