The Pros and Cons of Discounts in Service-Based Business

Welcome to Live With The Pricing Lady.

I'm Janene, your hostess.

This show is all about helping you build a sustainably profitable

business while making an unbelievable impact on your world.

Learn from my 20 years of experience and from my guests as we discuss their pricing

challenges, failures, and successes.

Pricing is a way of being or behaving in your business.

My mission is to help you confidently charge for the value you deliver.

Pricing is either hurting or helping your business.

Let's make sure it's helping you reach your dreams.

In this episode of Live with The Pricing Lady, we're talking about discounts and

promotions and whether or not they're the right thing for your business.

Sit back, relax and enjoy the episode.

Today, we're talking about whether or not discounts and promotions are

effective when it comes to attracting and retaining customers in your business.

Now the short answer to this question is it depends.

I know you may not like that I say that, but it is absolutely the truth

because discounts and promotions are not appropriate for all businesses.

This is one of those things.

Once again, in a pricing context that comes down to you, making a strategic

decision about the kind of business that you want, and what's going to

work most effectively when it comes to your pricing strategy to help

you reach your business objectives.

We're going to take a look at this in a few parts.

First, we'll look at the pros and cons of discounts and promotions.

And then we'll talk about the types of businesses that could

use them more effectively.

And those that should shy away from them, or definitely not use them at all.

And then I want to talk to you about what I see, especially in the

service industry, your coaches, your wellness therapist, your freelancers.

Your consultants even know what they get wrong when it comes

to discounts and promotions.

So let's get stuck right in.

, as I said, we're going to start by understanding what are the pros and

cons of discounts and promotions.

Maybe I should be clear.

I think discounts are fairly clear.

You offer a discount, you're lowering the price.

Promotions are usually tied to you doing something in order to get the

promotion like an early bird offer.

When you buy earlier, you get a better price, right?

I want to be clear discounts and promotions, they can seem

like similar things, but there is a slight difference there.

what are the pros of using discounts and promotions?

first of all, one of the major reasons that businesses use them is to increase

their volume in the short term so they can get, they believe with lower

prices that they can get more sales.

Yeah.

And a lot of times people are actually trying to be more profitable in the

short term as well, but they misuse this and we'll talk about that more later,

but they misuse their discounts and promotions thinking I'll discount now.

I'll get more people to buy and I'll make more money.

But as you'll hear later, that often doesn't work so well.

It can help you to increase volume short term.

And in some cases, although not very often, it can also

help you earn more profit.

Well, take a look at that later.

It can help you to attract new customers.

So if your discount or promotion is targeted towards people who

have never ordered from you, then that would be a great way.

If they're interested in discounts and promotions on that thing, for them to

be attracted, to buy from you, right.

It can help improve your cashflow.

So sometimes I'll advise customers.

Okay.

If you want to pull in more cash before the end of the.

Year, make a special offer.

So if you want to do that and people are interested in what you have

to offer, and if that promotion is attracted to them, then it may

actually bring you additional cashflow.

You might not have otherwise had.

Promotions, especially can create brand awareness.

So of course, as a promotion, you usually make some sort of communication.

And if you're communicating, not just to your existing clientele, but

to attract new customers, then that can create a lot of brand awareness.

One of the biggest special promotions ever, is the McDonald's happy meal.

Right.

That is a promotion.

You get a bundled offer with a little goodie inside for a special price.

It's precisely what a special promotion is.

They're doing that in part to create brand awareness, but

also because they know that.

If mom and dad bring their kid to get a happy meal, chances are

they're going to buy something else for themselves along with it.

They ended up selling more.

They can create brand awareness.

It can also create additional sales.

Last promotions and loyalty discounts can help you retain customers.

It's absolutely true, depending on the type of business.

So here in Switzerland, we have the co-op and they have a, every few months

they have a special promotion where you collect points on pride, the super Puente.

Where you collect points and then you can buy things when you have so many

points at a reduced price, right?

So this is the help people to be more loyal to them because in order to

collect points, they have to shop there.

That's one way in which a special offer can help you with.

Retaining customers or customer loyalty.

The problem with the pros is this is not the case in all types of businesses.

Before we look at where it's most effective.

Let's also talk about the cons of discounts with special promotions.

Now probably the number one con or downside to these is that.

They can he rode your profits?

That's why you need to be very strategic about when you discount

or when you make special promotions.

What your business objective is behind it.

And then you want a monitor that sort of is not working as you plan.

You can adjust because the last thing you want is a special promotion or

a discount that erodes profit and doesn't bring any added value for you.

They can hurt your brand.

So special offers and promotions are discounting the price, which

is effectively saying to customers that it's worth less than you

said with the original price.

So it can hurt brand perception and especially.

In markets or industries where people there.

You know, like in luxury brands, especially discounts and promotions

are rarely if ever effective.

Or definitely mostly not used at all because of the negative

impact it has on brand perception.

That's just, yeah, the way it is now, if you see electuary brand starting

to offer them, that probably means that they're trying to shift who

the target market is, which is a different objective for their business.

And that would be reflected in the strategy there.

Your discounts and promotions can condition customers to certain behaviors.

So for example, if you always offer discounts on what you offer on black

Friday, then people may wait until black Friday, each year to make a

purchase from you because they know that they will get a better price.

And there was something that they don't need to buy at other times of the year.

Then why wouldn't they?

It would be a no brainer just.

Right.

Right.

So like a lot of electronics on cyber Monday.

People wait until cyber Monday to purchase such things because they

know they can get a much better deal.

So you have to be careful about how, what you do, conditions, the customers

to behave in a certain way, because it can be not so good for you, but it can

also not be so good for them as well.

Another con is that discounts and promotions are very short-term focused.

So at the very beginning, I said, one of the pros was to

increase volume in the short term.

And it's true.

Let's say you decide to offer a discount.

It might increase your volume, but probably that volume

increase will be temporary.

Right?

You might get a small peak and then it will flatten out again.

And if you want to do something that's more sustainable than

discounts and promotions may not be the most effective way to do that.

Depends on what your objective is for offering that discount or promotion.

And the last con is it can have a negative impact on the competitive environment.

So, of course, if you're in a really cutthroat environment where your

customers are super price sensitive.

And you offer a discount, your competitors might offer a discount

and then you have to counter.

And then all of a sudden you end up in a price war.

And that is good to no one contrary to popular belief.

Price wars are not even good for customers because in the end they will

have less choice because businesses will go out of business because

they can't make enough money and compete anymore in the marketplace.

That is not only not good for them, but also not for the customers.

What's important when it comes to thinking about discounts and promotions for your

business is to be clever about what you choose to do, how and when as well

as clear about why you are doing it.

This is super important.

If there's anything you remember from this episode, I want you to remember

that every discount and or promotion that you offer should have a very

specific business purpose behind it.

Now, before we get into what I see that people get wrong.

I said, I would share with you.

Which industries.

Discounts and promotions work better in and which one should

either shy away from it or probably will use them hardly at all.

When it comes to the businesses where these can be very effective.

We're generally going to be looking at retail and consumer.

One of the things that I talk about a lot.

And share with people is what most of us are familiar with and know about

pricing comes from being a consumer.

What we see in the consumer industry is lots of discounts

and special offers and deals.

And we're just bombarded with them constantly every day as a consumer, right.

What happens is if that's all you have learned about pricing is from

being a consumer and you take those tactics and strategies and you try to

bring them into a business that isn't retailing and simmer, and you try to

use those tactics and strategies in the, in a different kind of business.

They aren't effective.

They don't work.

And that's one thing that people get wrong.

So, These types of tactics and strategies work very well or

better in retail in e-commerce.

And consumer goods.

And in services that are not knowledge based.

So let's say like everyday services.

Like haircuts salons, spas, you know, things like that,

as opposed to your coaches and consultants and things like that.

So those are the areas that are going to be using discounts

and promotions more heavily.

Now, one of the reason, at least for the first three for your retail, your

e-commerce and your consumer goods.

The main reason that they are offering all of these special

promotions is to move inventory.

And create customer loyalty.

Or both.

Right?

So if you think of the clothing industry, we have seasons and they're

trying to shift out the old stuff so they can bring in the new stuff.

And that is the cycle that they go through.

Now take the strategy.

That's based on shifting inventory and you apply that to a coaching

business, for example, or a freelance business is kind of weird, right?

You're not shifting inventory.

Why would you do that?

That's a good thing for you to reflect upon.

Now the type of businesses where you should either not use them

at all, or be very cautious about using them are luxury goods.

Niche markets.

So let's say you've created a handbag out of a new revolutionary material.

That's pretty niche.

I'm not sure that discounting your offer is the right way to get into the market.

You have to think about what that strategy means in the short and the

medium and the long-term low, super low margin businesses could be pretty

hard to be able to offer promotions because your margins are so low.

It will just erode your profits.

Professional services like consultants and coaches or a B to B businesses.

It's pretty difficult to do promotions in those type of businesses, although

I'm sure there are businesses out there in those areas that do, but I

was be very cautious about doing it.

In those types of businesses, you might use discounting.

But I'm going to talk in a moment a little bit more about different

something different that you might consider doing, as opposed to always

just turning towards offering a discount.

Also new and growing businesses should be really careful about

discounts or promotions because of the impact it has on profitability.

Now this doesn't mean you can't use a penetration strategy

and go in at a low price.

And quickly gain volume and raise your price.

But most people forget the second step of that, which is quickly

raise your price because they don't gain the volume that they think.

And then the strategy becomes ineffective very quickly.

But we're not talking about strategy today.

I have another episode on that and I'll put a link in the show

notes for this, so that if you want to check that out, you can.

But I wanted to say for new and growing businesses, discounting and

promotional strategies can really backfire because of the impact

they have on your profitability.

But also because of the impact they have on the perception of value.

Those are the types of businesses that might use it, versus those who might not.

Now let's turn our attention to what it is that I see you guys doing wrong.

I'm going to focus specifically on your coaches, your consultants,

wellness therapists, freelancers.

But a lot of these apply also to your software and your

product based businesses.

Don't think you are off the hook.

So the first thing that I see people doing wrong is they rely on discounts.

Because they feel uncertain or nervous, or they don't believe in the value

of what their offer and they end up undervaluing themselves and then they

rely on discounts to make up for that inadequacy that they feel let's say.

So too much can lead your clients to perceive that you don't believe the value.

And if you don't believe the value and neither will they, and

that is a really important point.

How have I seen this?

I've seen this.

People offering what I call preemptive discounts.

So they offer discounts just because they feel nervous that the

customer won't accept the price.

And this is rarely if ever a good reason to offer a discount.

You need to be more thoughtful and strategic about what you offer.

And instead of doing it out of fear, So the second thing or challenge that people

have is they have no real clear business purpose behind why they're offering

this discount or special promotion.

So years ago I had a client and she came to me with like a year plan for all

the promotions she was going to offer.

And I was quite surprised by that because I didn't understand where it

was coming from when we discussed it.

She said to me, well, that's what I see everybody else doing.

So I just thought that's what I was supposed to do.

Yeah.

Right.

So this goes back to that.

What you see as a consumer.

And also what you see, you know, even other people in your business.

Are in your industry may be doing something.

But that doesn't necessarily mean it's the right thing for you.

You need to look at it more strategically.

That's what we did together.

We had a talk about.

You know, what w what were the objectives behind these different special offers

shoes making, and what needed to be done and what was really not necessary.

And then she came back with a different plan with a lot less.

A lot flavor special offers in there, but she felt more confident about what

she was offering because she understood the business purpose behind each one.

And that is also very important because you want to be able, somebody asked you,

okay, well, you told me it was this price.

Why I'm, why I'm grateful to have a discounted price, but you know, why.

Why is that, then you'd be able to help them to understand that value.

So you really want to make sure you have a real good business purpose behind it.

It can be, want to increase profit.

You want to attract new customers.

You want to increase your volume.

But by having that business purpose, then you can do the next thing.

Which is make sure you do the math.

Now most people will not do the math to understand.

Whether or not, this will really help them achieve their objective.

And what it will take to get there.

So let me give you an example.

This example is a product based business, but it is very similar

for a service-based business.

So if you have a product that has a gross profit of 40%, that means,

for example, the price is 100.

The cost to manufacture are 60.

So you have 40% gross profit or gross margin.

If you have that sort of situation, let's say you think to yourself,

I'm going to lower my price by 10%.

And I'm going to sell more.

And therefore I'm going to make more money.

This is one of the great fallacies pricing.

So the question that I want you to ask yourself is if I lower the

price by 10%, how much more do I have to sell in order to break?

Even on gross profit.

So if you had this product of a hundred and let's say you have a hundred,

you're going to sell 10 of them.

Right.

So that would be a thousand dollars.

But if instead you sell it for 90.

In order to still hit a thousand, you're going to have to sell more

at 90 than you would at a hundred.

Right.

Well, the answer to the question is if your product is a gross profit of

40%, and you want to decrease the price by 10%, you have to sell 30% more.

Units.

Before you start to break even on profit, not earn more money, but break even.

And 30% is a whole lot.

It's a whole lot.

Most people don't do the math.

So they don't understand that, which is why they offer the discount and then

they don't end up making more money.

So it's important that you do the math and understand.

What it's going to take in order for you to hit that objective.

That's behind the reason for you making that offer.

If it's to get 10 new clients.

And you offer that promotion and you only get six new clients, then

you may choose to do something else.

Next time.

Because it wasn't effective this time, or you may choose to handle that.

Discount or promotion differently.

That's the kind of thinking that I want you to get into.

Another thing that people do is they don't have any real clear

boundaries when it comes to their discounts and special promotions.

So this can come in two ways, either boundaries for themselves.

They're not clear about under what conditions they'll

offer certain discounts and.

Or when you know what things customers have to do in order

to get a certain level of price.

And, or they have those, but then they kind of throw them away when

customer, when they either need more business or when they feel nervous.

Or when they want to be nice.

Right.

You need to have clear boundaries for both yourself and your customers so

that you are doing the right things at the right time, in the right way.

And that does require some effort, but it will help you

protect the value of your offer.

And your profitability.

Here's one of my favorite things actually before, let me

say, Nope, we'll do that one.

So one of the things that people can do or should do more of, especially

in services is instead of offering discounts, they should adjust the value.

And that means either taking things out of the offer.

So the value is the value is adjusted and therefore it justifies a sh

a smaller price or a lower price.

Or you can add things in, you keep the price the same, add in a little

something that's easy for you and maybe even mutually beneficial,

but is a value to the customer.

So they feel like they're getting something, but you

are not adjusting your price.

I love this tactic and strategy, especially for your

coaches and your consultants.

Because it allows you to be able to play.

On the price side of the price of value scale.

Next people are offering too many discounts or special

promotions way too often.

Now in some businesses, if your customers are customer, if your target customer.

He loves getting a discount and that's like part of their, their being right.

There are people who buy just because they save.

If that's your target customer.

Then you're going to use discounts and special offers to attract them.

But for most of the type of businesses that are working with me, people who are

following me, this is probably not, you.

Is it probably, but probably not your customer base.

And also this does is two things.

It undermines your confidence.

It undermines your income stability.

And it messes with the value perception of your offer.

So please, please.

Be very selective about what you're doing when it comes to discounts and promotions.

Okay.

Last one.

The last thing that people get wrong is communication.

They don't communicate their discounts and promotions effectively.

That can mean that they attract the wrong.

Audience, it can mean that customers don't actually understand

that they're getting a discount.

It can mean that people don't understand that there's a trade

off in there that they're giving up some value to get the discount.

There are a lot of things you can do and all in the end, what it

means is people don't actually value the discount that they're getting.

And they start to think that that's the real price and what they're

going to be paying in the future.

And if that's something that they might buy from you repeatedly, then

you're anchoring them to that lower price, which is not going to bode

well for you later on down the road.

With all of that said, does that mean you shouldn't ever

offer discounts and promotions?

Of course not.

There are a lot of good reasons (to do so), but I want you to be very

specific about what you choose to do, why you choose to do it and

how you do it in your business.

Thank you for listening to this episode of Live with The Pricing Lady, the podcast.

If you enjoyed the episode, rate, review, and subscribe to it, then share

it with your friends and colleagues.

I love hearing back from you listeners.

If you've got comments, questions, or topic ideas, go on over to thepricinglady.

com and contact me there.

Not sure where to start when it comes to improving pricing and profits?

At ThePricingLady.

com you can download a copy of my Self Assessment Pricing Scorecard.

Find out where it's going well and where you can begin improving.

Or just simply book a discovery call with me.

There we can discuss what's up with pricing in your business and

how I might be able to help you.

Thanks once again for joining.

Remember, pricing can hurt or help your business.

Let's make sure it's helping you reach your dreams.

See you next time and as always, enjoy pricing.