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The Art of Discounting
Activate dormant customers
with strategic discounting.
Rafi Mohammed, Ph.D (September 20, 2010)
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) taking advantage of these price breaks. In the best case
scenario, all current customers continue to pay full price and the
discounts generate pure incremental profits. However, it's more
likely that some existing patrons end up buying at the lower price.
Thus, for a discount to be successful, profits from new customers
must be greater than the margins lost from current buyers.
Sell Through Discount Channels.
A recent news article notes the trend of
upscale retailers seeking growth from outlet stores that target
Outlets have been a long time strategy for upscale retailers such as
Saks and Nordstrom, which respectively operate Off 5th and Nordstrom
Rack stores. 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. In a similar
vein, Morton’s is promoting its $5 bar bites that are only offered
in the steakhouse’s bar areas.
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 (S), 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.
And while companies can’t start a new brand tomorrow morning, they
can sell their products at a discount via private labels. Just last
week, Sprint announced a $300 million deal to provide service for
Cricket, the discount cellular company. 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. The Private Label Manufacturers Association
estimates that 65% of all food and beverage companies, including
Sara Lee, Hormel, Bird’s Eye, and Del Monte, are involved in private
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
It’s understandably stressful if a company
loses, say, 15% of its business. In these situations, it's common to
take a “slash prices and hope for the best” stance. 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.
(Note: Rafi Mohammed, Ph.D is the author
of The 1% Windfall: How Successful Companies Use Price to Profit
and Grow (HarperBusiness). He has been working on pricing issues
for the last 20 years. Rafi Mohammed 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 (in residence, Spring
2001). A frequent commentator on pricing issues to the print media,
Rafi has also made prime time appearances on CNBC as an expert
pricing commentator. He is an economics graduate of Boston
University, the London School of Economics & Political Science, and
Cornell University (Ph.D.). To order the book, click
[i] Rachel Dodes, “Tony Retailers Hope
Outlets Fuel Sales,” Wall Street Journal, August 9,
[ii] Sonia Reyes, “Saving Private Labels,”
Brandweek, May 8, 2006.