The Art of Discounting
August 15, 2011 | 4:07 pm CDT
The Art of Discounting

In today’s erratic economy, the key to growing your business involves activating dormant customers by using strategic discounts. By “dormant,” I mean customers who are interested in your product or service, but have refrained from purchasing due to price.

The “art of discounting” involves offering lower prices to attract new budget-conscious customers in a manner that minimizes the possibility of current buyers (who are paying full price) from taking advantage of these price breaks.

Sell Through Discount Channels
A recent news article notes the trend of upscale retailers seeking growth from outlet stores that target budget-conscious customers. Outlets have been a long time strategy for upscale retailers such as Saks and Nordstrom, while this year Bloomingdales, Lord & Taylor, and Neiman Marcus are all opening new discount-oriented stores.

Outlets are generally not located in major metropolitan areas – thus they target different geographic customers as well as provide credible hurdles for current patrons to jump over — a long drive coupled with a limited selection — in order to reap discounts. Of course not all companies can open up a new outlet, however they can sell their products (and services) through distribution channels that target price-sensitive customers in a manner that reduces the chances of cannibalization (current customers buying at a discount).

High-end brands such as Starbucks, Hyatt Hotels, and Godiva have sold discount gift cards through Costco, for instance.

Create a Discount Brand
It’s common for companies to create a new brand to serve a price sensitive audience. Sprint, for instance, operates the prepaid cellular provider Boost Mobile. Boost’s $60 unlimited Blackberry package (talk, text, web, email) is considerably lower than the $99.99 “Simply Everything” plan offered under the Sprint Brand which provides the same unlimited features.

While companies can’t start a new brand tomorrow morning, they can sell their products at a discount via private labels. To protect their brand, many manufacturing companies don’t want the public to know that they are selling discounted products. With the right confidentiality contract in place, who manufactures house-brand products can remain a closely guarded secret.

Use Tried and True Tactics Such as Coupons, Sales and Promotions
While these strategies are commonly used, they generally are not implemented correctly.

Instead of viewing these discounts as a way to “move merchandise,” think about these techniques as avenues to activate price-sensitive shoppers while keeping your current base paying full price. This involves creating hurdles (such as early morning sales on off-peak days, making customers clip and redeem coupons, etc.) that allow budget-minded customers to credibly raise their hands to say, “Price is important to me.”

It’s understandably stressful if a company loses, say, 15% of its full-paying customers to these discounts. However, I view this same situation differently. I prefer to focus on the fact that 85% of customers are still paying full price. The art of discounting involves maintaining current prices and implementing pricing strategies to activate dormant customers with low-price options.

Editor's note: Rafi Mohammed, PhD is the author of The 1% Windfall: How Successful Companies Use Price to Profit and Grow. He has been working on pricing issues for the last 20 years and is the founder of Culture of Profit LLC, a Cambridge, MA-based company that consults with businesses to help develop and improve their pricing strategy. He also holds the title of Batten Fellow at the University of Virginia's Darden Graduate School of Business. A frequent commentator on pricing issues to the print media, Mohammed has also made prime time appearances on CNBC as an expert pricing commentator.

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