07 Dec Dangers of Discounting
If you have a lot of yarn or fabric that you need to move, often the first impulse is to slash the price to get it out the door. After all, everyone loves a bargain, so lowering the price will make the product more attractive to your potential buyers and the problem is solved. Or is it?
Discounting your prices comes with risks that have long-term consequences for your bottom line. Let’s take a look at some of those risks and then explore some ways you can add value for your customers that will both move your product and build loyalty, resulting in stronger relationships and thus increased sales.
Discounting can steal current sales. If everyone in the industry knows that your company does an annual 30% off yarn or fabric sale in June, you’re going to see your May and July sales dip considerably because your customers will wait to restock, stock up during your sale and then not reorder for as long as they possibly can.
Making up your discounted price by increasing volume is not as easy as it sounds. If you don’t believe it, take a look at the Rudimentary Pricing Strategy case study offered by Kumi Bradshaw on LinkedIn. Discounting the hypothetical product by 25% requires a 50% increase in volume just to break even. That’s a lot of skeins and bolts!
Discounting devalues your product and trains your customers to expect that discounted price—so you’re establishing a new baseline. When you encounter higher production costs and actually need to raise your prices, you have inadvertently created an opportunity for your customers to find a lower-cost alternative to your product.
Consider these alternatives:
- Start a loyalty program. For every $250 a customer spends with you, s/he can redeem 10% off on a purchase of choice. Giving them the choice of when to redeem creates goodwill and keeps them coming back to your store.
- Offer a coupon code to your newsletter subscribers. Once word gets out, your email list will grow, too.
- Make it a fun special event. One store we know did a “Lights Out” party and stayed open late the night before Halloween. With everything in the store 15% off, customers shopped with flashlights and headlamps, then stayed for snacks.
Discounting can also pose a risk at the wholesale level.
Maybe your biggest seller is a basic worsted-weight wool. There’s a lot of competition in that category, and you might think that by discounting your bag price you could gain a greater share of the market, either by your current customers buying more, or by bringing your line to new LYSes. It can certainly work, but global wool prices and production costs are not completely under your control and at some point, your low price will become unsustainable. What are some better strategies to offer value to your customers?
Consider these alternatives:
- Offer payment discounts as an incentive to improve your own cash flow. If you offer 90-day terms, give a 2% discount for payment within 60 days.
- Reward loyalty and/or volume. If a LYS orders a 10-skein bag of every color available in your line of worsted-weight wool, offer a second bag for free in the five or ten most-popular colors. It helps them gain a reputation among their customers for having sweater quantities of yarn even for larger sizes, potentially increasing their future orders, but it doesn’t lower the price across the entire order.
- Go ahead and discount discontinued products and colorways. It will move your closeout inventory and after all, everyone loves a bargain.
Whether you are selling B2C or B2B, approach discounting as a tool to be used mindfully and appropriately. Your goal is to make it work for you, not against you.
In the big picture, the best strategy is developing a long term relationship with your customer that develops familiarity, trust and loyalty to your brand.
Stitchcraft Marketing can help you create strategies that help you with both goals– achieving long term quality relationships and throwing in a well-timed discount strategy. Email us if you’d like to learn more: Leanne@stitchcraftmarketing.com.
Garrick ArnoldPosted at 09:54h, 16 October
Great stuff! I’d add that in addition you can look at add-ons or “free” items customers receive with a purchase. Depending on the item the out of pocket cost of the “free item” is wildly less than any discount a retailer can offer but the value perception is significantly higher. Keep up the good work!
Leanne PresslyPosted at 11:50h, 19 October
Very true, Garrick!