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2012

Discounts_Body.jpgby Cindy Waxer.


Customers love a good bargain. But for a small business, deciding on a price that will lure shoppers while still generating a profit is a difficult endeavor. After all, if you price a product too low, a deep discount can significantly eat into a company’s profits. At the same time, by failing to offer an appropriate price cut, you might push consumers into the arms of competitors.

While there’s no secret formula for setting a price, successful small businesses watch out for the dangers of deep discounting. Read what today’s experts have to say about seven important risks of constant price cuts. 


Price sensitivity. Selling your products and services at a fraction of the cost can drive consumer price sensitivity, affecting shoppers’ buying preferences and encouraging them to pinch pennies rather than part with their hard-earned dollars. “You’re attracting a discount coupon shopper and that’s not how you make money,” warns Bob Phibbs, a retail consultant and author of Groupon – Why Deep Discounts are Bad for Business. “With constant discounts, the only way you’re going to keep customers coming back is by giving them equally as big a discount every time.”


In fact, according to a recent Retail Systems Research report, Retail Pricing In a Post-Channel World, 67 percent of survey respondents report consumer price sensitivity as a top-three business challenge, up from 46 percent in 2010.


Discounts_PQ.jpgEroded profit margins. While price chopping pleases shoppers, it can drastically eat into a small business’ profits. “Companies don’t run on revenue; they run on profit,” warns Brad Sugars, founder of business coaching firm ActionCOACH. “The moment you start discounting, you lose a lot of your profits.”

Phibbs agrees. “When we give these deep discounts, we kid ourselves and say that it’s because the economy is bad or we need the money. But what we’re essentially doing is giving up on being able to charge full price.”


Lost customers. Consider the loyal, long-time shopper who purchased a blouse in-store for $80 and then discovered that her neighbor purchased the same item on the company’s website for $60. Chances are, you’ve not only angered that loyal customer, but you’ve lost her to the competition. By failing to consistently cut prices across multiple channels, Phibbs says, “Your loyal customers are going to wind up very upset with you. That’s because someone who hasn’t made you successful is now getting a better deal than them.” Instead, Phibbs recommends that small businesses “understand that it’s about getting people who already love you to come back more often.”


The wrong customer. Face it, says Sugars: “The simple reality is there are always going to be people who go towards the best price.” But do you really want those folks to be your key customers? According to Sugars, small businesses that heavily discount their products and services will “start attracting a type of customer who isn’t there for the service, the loyalty, or the value you add; they’re there for the price. The moment you start targeting these price shoppers, your quality customers will be long gone.”


What’s more, this discount pricing strategy may devalue your brand’s ultimate appeal. American automakers learned this hard lesson during the early part of the last decade, when their heavy reliance on incentives to sell their cars temporarily boosted sales but sent the wrong, long-term message to consumers. As Claes Fornell, director of the National Quality Research Center, explained in a Ward’s Auto article from that period, consumers began to perceive non-discounted vehicles from imported brands as having more value than the price-chopped domestic brands. “And once you start discounting it's hard to get out of the habit, and consumers come to expect it,” Fornell noted. “Discounts are a two-edge sword and have a negative effect. Low price contributes to a low opinion.”


Price wars. Pricing your products competitively is key to running a successful business, but not if it means engaging in an all-out war where business owners lose perspective. “There’s always somebody out there willing to give a lower price than you—I don’t care what it is,” says Phibbs. “But it’s a bad rabbit hole to go down.”


Ignoring the obvious. A trap that many small business owners fall into is focusing more on competitors’ prices than on their customers’ needs. “Learn how to sell,” advises Sugars, whether that entails offering customers special services such as home delivery, or refining your sales pitch. “At the end of the day, the best stores are going to curate the best customer experience,” says Phibbs. “And by giving people the experience they want, customers are going to drive past a competitor to get that experience again. He cites customer-conscious companies such as Lululemon Athletica and Victoria’s Secret as businesses that are “hitting on so many levels that are right because the customer experience isn’t just okay, it’s great.”


Overlooked alternatives. While Phibbs and Sugars agree that there’s certainly a time and a place for a deep discount, many small businesses make the mistake of overlooking more cost-effective alternatives to price chopping. “Get rid of the slow-moving merchandise on clearance sooner, make sure your employees know how to sell the merchandise that you think is going to move, and be willing to put the resources into providing an exceptional customer experience,” advises Phibbs.

From eating into profits to angering loyal customers, deep discounts can have a calamitous impact on a small business’s bottom line. To be sure, companies need to offer customers price cuts every now and again. But by satisfying consumers’ desire for the best price possible while creating a positive customer experience, small companies can grow while keeping their coffers intact.

QADooley_Body.jpgBy Erin McDermott.

 

What’s really going on inside your customer’s head? That’s the question that drives the work of Roger Dooley, an Austin-based marketing consultant, blogger, author and all-around curious mind about the role our brains play in purchasing behavior and decision-making. It’s a fascinating new field that might hold as many answers as it does questions. Business writer Erin McDermott recently spoke with Dooley about engaging shoppers’ senses, the power of the smell of a muffin, and why the sound of a price matters.   

 

QADooley_PQ.jpgEM: A customer walks into a retail shop. What’s happening inside the brain in terms of their senses that a small business owner should consider about their presentation?

RD: We may not know exactly what’s going on, but two things are quite certain. First, multiple senses are engaged. We tend to focus on the visual aspects of a store, but smell and sound come into play as well. Touch and taste are less engaged at the point of entry, though I’m reminded of the restaurant Chili’s where, to enter, you grasp a door handle shaped like—of course—a pepper. Second, it’s very likely that a snap judgment takes place within milliseconds. The customer hasn’t studied any displays, read signs, etc., but forms an immediate emotional impression. We know this takes place on websites, and the subsequent experience is shaped by that unthinking first impression.


EM: In your book Brainfluence, you write about how scent is often overlooked as a factor in selling products and creating an atmosphere in stores. Why are smells—good and bad—so compelling for consumers? Are there surprises in what actually draws customers?

RD: The olfactory pathway to our brain is fast and unfiltered, and smells are capable of producing emotional responses and triggering memories. This is why stores with bakeries ensure the smell wafts through the store interior. The smell of baking bread will get us salivating for a slice, and for many of us may trigger the memory of bread baking in our childhood. Bad smells have the opposite effect—they may trigger emotions like disgust, hardly the sort of encouragement you want to provide shoppers.


EM: Recently, you’ve written about how prices are displayed—even decimal symbols and commas make a difference in customers’ minds, as one new study reports. Are there easy steps small business owners can take to adopt to improve perceptions about pricing?

RD: For in-person shoppers, bold, colorful tags or signs on some items suggest that the item is a bargain. That is, if it looks like a sale, it probably is a sale. Some research shows that prices that appear precise—$498.22—are more credible than rounded ones—$500.00. Working in the opposite direction is that customers convert prices to spoken syllables in their brain, so a more complex price with decimals seems a bit larger than a similar number with fewer syllables. I always recommend testing various approaches to see what works best in a particular situation.


EM: Most merchants at some point have had to deal with an irate customer, through angry phone calls or nasty online comments on a company website, for example. Is there a psychological approach that’s best in effectively defusing a hostile situation?

RD: The simplest solution is apparently one of the best: saying “sorry.” One set of experiments showed that rude behavior by one individual caused an increase in the probability of retaliatory theft by another individual who was the victim of the rudeness. When the first person apologized immediately after the behavior, the retaliation effect disappeared. In general, you won’t convince an unhappy customer that the problem was their fault, though some merchants try. It’s better to apologize quickly and solve the problem.


EM: Your work focuses on what’s happening inside the buyer’s minds. As a consumer yourself, how does what you’ve studied affect your own shopping behavior? How does your family respond when they’re out shopping with you? 

RD: Like most people, I—incorrectly—assume that I’m totally rational in my shopping behavior and would never be influenced by all these non-conscious effects! Seriously, I don’t worry too much about it. I do pay attention to marketing techniques that businesses use and admire those firms that do things well. I now shop often at a Texas supermarket chain, HEB. There’s research that shows a small food sample improves your attitude, even about unrelated things. In one experiment, people rated their home television better if they had been given a food sample. Whether HEB knows about that research or just wants to create a fun store environment, I’m not sure, but they have many more sampling stations than their competition. Sushi, muffins, cheese, wine, and even freshly cooked food items are spread around the store, though most heavily near the entrance. Of course, at some times of day there are no samples. My disappointment when I’ve missed the tasty morsels suggests that those samples are part of why I prefer that store.

 

Note: This interview has been condensed and edited.

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