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The Strategy Behind Discounting

To discount or not to discount? For CFO’s, CMO’s, and other business executives, the question of whether to reduce the prices of their products is a tricky one. On the plus side, offering discounts brings in new customers, keeps existing customers loyal, moves out stagnant inventory, and increases orders. However, discounting can also erode brand integrity, eat into margins, and even open retailers up to the risk of fraud. Before deciding whether to extend discounts and special offers, retailers need to weigh the pros and cons carefully and consider alternative strategies to standard discounting practices.

Discounts are extremely effective at driving traffic and sales. New customer growth and a bump in sales can result when price-conscious consumers, who actively search for coupons, discounts, and special offers in places like RetailMeNot, Red Plum, and daily deal sites like Groupon discover irresistible discounts. Emailing a special offer to existing customers who haven’t placed an order recently, or to shoppers who placed items in their online cart but didn’t complete the purchase, is often enough of an incentive to create a conversion.

Slashing prices in-store or partnering with flash deal sites like Gilt or Woot! can also help manage inventory by clearing out old or seasonal items that are taking up valuable warehouse space. Sales can be timed to offset seasonal slumps or boost order volume to meet quarterly or yearly sales goals. Some retail brands like Grocery Outlet Bargain Market, Dollar General, and Payless Shoes are built around offering affordable pricing. Car rental companies like Budget and Dollar don’t have many differentiators outside of price.

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However, establishing a business model around a discount brand can be risky. J.C. Penney (JCP) learned this lesson the hard way in 2012 when the company renounced coupons in favor of everyday low pricing and a “fair and square” pricing structure. JCP’s customers balked at the new strategy and took their business elsewhere.

JCP’s struggles illustrate a common problem with discounting: their core customers were trained to wait for sales and they were motivated by limited-time offers and expiration dates. When they didn’t perceive JCP products to be a bargain anymore, they were no longer loyal to the brand.

By consistently lowering prices, retailers also run the risk of degrading customer confidence in the value of the products being offered. Connecting Threads, an online quilting fabric shop, experienced this difficulty first hand.

“In the past, our company operated on a highly sales-driven basis that was reliant on discounts, and unfortunately, that business model trained our existing customers to wait until the merchandise went on sale to make a purchase,” explains Alisha Runckel, marketing director at Connecting Threads. “Over the past two years, our focus has been on validating the high quality of our fabrics and why our everyday pricing is a good value, and also being very selective about when and if we run promotions.”

Brands like Louis Vuitton, Hermes, Cartier, Tiffany’s, and Apple rarely reduce prices. Instead, these brands rely on their exemplary customer service and reputations for quality products to create value for their customers. In these cases, discounting would cheapen their brand integrity.

To maximize the upside of discounting while minimizing the negatives, retailers should consider what they are trying to achieve by offering widespread discounts, and whether there is another way to reach that goal.

For example, instead of giving loyalty club members 10 percent off their entire order every day, a company could choose to reward loyalty and encourage repeat purchases by offering coupons for frequently purchased items, VIP treatment at an upcoming event, or a free gift with the tenth purchase. Cultivate loyalty by forming relationships with customers and tailoring offers to their needs.

“Offering an exclusive discount to teachers and students on Karen Kane clothing has helped us connect with our customers on a more personal level,” says Michael Kane, marketing director for Karen Kane.

To reach new customers, create exclusive discounts for select targeted audiences like military personnel and their families. There are over 32 million consumers affiliated with the United States Armed Forces, either as active-duty, military family members or veterans. This market has a buying power of over $1 trillion, and recently discharged military personnel spend over $700 million annually on apparel. Offering an exclusive military discount online is an effective way to reach this audience. To keep the discount exclusive and protect the offer without hindering marketing reach, many businesses, like on-trend apparel retailer Buckle, rely on military verification software.

“Using verification software has expanded our reach within the military community,” explains Cassie McDonald, project manager for Buckle. “Before we could verify military status online, we only offered discounts on online orders that were shipped to APO/FPO addresses. Now we can confidently give 10 percent off to any enlisted service member, their spouses, veterans, and reservists.”

A military discount is an effective tool to reach new customers in the military community, because 94 percent of present and past military personnel say they notice when companies are “military-friendly” and have a positive impression of those companies.

Retailers can offer targeted discounts to any customer segment, not just military. Special discounts like employee, military, and student offers used to expose businesses to potential fraud because unqualified customers could take advantage of the discounts, but with developments in eligibility verification, this is no longer a risk.

The key to successfully reaching new customers using targeted discounts is creating an offer that is logical, exclusive, and different than any other existing promotions. Shoppers respond well to discounts that are offered for a reason. Showing appreciation to military service members, teachers, or first responders is a good reason for giving a discount. Giving volume discounts, seasonal sales, and bundled deals are other examples of offers that make sense to consumers. Instead of a dollar amount or percentage off, many shoppers also respond well to offers that address a pain point like free shipping, free returns, free layaway, or better terms.

It can be difficult to find the optimal combination of promotional offers to reap the rewards of discounts like increased sales and quicker inventory turns while maintaining brand integrity and a reputation for high quality. By getting creative when implementing special offers and by using discounts strategically, retailers can balance the positives and negatives of reducing pricing and avoid being labeled a discount brand.

jakeJake Weatherly is the CEO and co-founder of verification technology provider SheerID. By acting as a bridge between secure databases, SheerID allows commercial enterprises to accurately and instantly verify whether or not their customer qualifies for special offers — protecting the discount and eliminating fraud.