Black Friday has certainly become a crowd divider, but love it or hate it – discounting is a huge part of pricing strategy and when managed well it can form part of a successful marketing campaign. However, getting sucked into the “race to the bottom” can also be a dangerous game and business owners must approach discounting with caution and strategy. If you’re new to pricing, or could do with some expert tips, hopefully you’ll find something here that works for your business.
Understanding Value
Customers are often enticed to pay for something when the cost of it is less than the perceived value of it. Value can be hard to quantify for unique offerings but when something is discounted there is a direct comparison to its original price, which creates a perceived “bargain”. The trick is to create enough of a bargain to entice your customers to pay, whilst still maximising the profit margin for yourself. Understanding what exactly your customers value/where their sweet spot is is crucial in designing an effective discounting strategy.
Cost Awareness
Business owners often know their gross margins (the RRP less the cost of an item) off the top of their head, but do you know your net margins? i.e. after deducting all the other costs of your business. Don’t fall into the trap of thinking you can reduce your prices down as far as the cost price, without understanding that this could push you into a loss-making position if your other costs aren’t being covered now.
Basket Size
Something worth thinking about is your “cost per order” – so if someone buys 5 products versus 5 people buying one product each. The one person who buys 5 products costs you considerably less in terms of packing, delivery, administrative tasks, etc. Offering a discount which only kicks in once your customer reaches a certain basket size can be effective at encouraging larger order sizes. Have you ever been in the position where you added another €20 item to your basket to save €5 shipping fee when you never would have bought the €20 item otherwise?!
Bundling
Similar to basket size, this can encourage larger orders, and is also an effective way to sell stock which may be more difficult to shift – whether you’ve over-ordered quantities, or items that will shortly expire/be out of season. Bundling with other products creates a perceived value, even when a customer may not necessarily value the product at a reduced price on its own.
Competition
As with all pricing strategies, market analysis is key in order to identify your customers’ alternatives on the market. Yes there are impulse buys for a bargain, but people still shop around. Understanding how your discounts compare to your competitors (in terms of both value and timing) will help you develop a strategy that attracts customers who may be common to both.
Percentage versus Euro Saving
This is all about perception – whether a 25% discount or a €50 off sounds like better deal to your customers. It has to both attract them (in the especially crowded marketplace of Black Friday!), and also convert them to buy. Being creative can be eye-catching, and testing your customers’ feedback to a sale can be a process of trial and error to see which offers are most successful for your business.
Pricing is a delicate balance, and discounting can be even more delicate. One last tip is to remember your goals of the campaign before deciding on your discounting strategy – is it to shift inventory? to raise brand awareness? are you prioritising bringing in cash and are happy to sacrifice your profit margin to do so? The more factors brought into your decision making, hopefully the more informed discounting strategy you design.
I work on pricing strategies with my one-to-one clients and also offer this in my one-off consultations – where you’ll complete a pre-questionnaire and we’ll spend the time digging in to your business to find a pricing strategy that works best for you. If you prefer a DIY approach, make sure you sign up to our newsletter to be the first to know when our “Master your Pricing” toolkit launches.
