About 4 years ago, I wrote about why discounts are stupid, what happens when you rely too much on discounts, and where you can point your attention to keep from discounting uncontrollably.
I wanted to take a moment to rethink this since I just took a class on pricing and discounts this past week and I was surprised about what I learned.
Originally, I wrote that discounts tell us 3 things right off the top:
- You don’t believe in the full value of your product.
- You open a mental trap door that can’t be closed.
- If you start discounting, you start getting people to think: “How low will they go?”
What do I think now?
First, price is a signal.
So if you start discounting, you are still showing that you don’t believe in the price you set forth.
I simplified it at the start to focus on the full value of what you are offering, but I’ve come along to also recognize that this pricing mistake likely means that you just did a poor job of your marketing strategy at the start.
So before you discount, you need to revisit the decisions that you made to get to the price and look for the reason that you have priced in such a way to begin with.
Because more likely than not, the pricing challenge you are facing has as much to do with a link in the chain of your strategy as it does with the price you are charging alone.
Second, the mental trap door still exists.
Since Martin Lindstrom’s book, there have been other studies of the mental triggers that go off in your head when you discount.
Studies have shown that when you charge more, the pleasure receptors in your brain are animated in a much more vibrant way. We’ve seen the implicit bias that discounts put into your brain as well.
My thinking here hasn’t really changed much, but it has become more well-rounded.
Meaning, I recognize that there are benefits and pitfalls with pricing up and down.
So you have to make these pricing decisions wisely.
Third, “how low will you go?”
Yes! That’s still a challenge.
In the past four years, I’ve also come around to being a lot more conscious of the issue of brand equity as well.
The thing about discounting is that you open the door to a race to the bottom. You undermine your brand. And, you likely lose credibility.
On the recommendation side, I said 3 things and let’s look at them again:
- Price correctly at the start.
- Increase perceived value.
- If you do discount, bundle it into something else.
First, price correctly.
I’m not coming off of this one. Maybe, ever.
The truth is that in most cases we underprice. I recognized that last year.
I fixed it.
Then I went to a couple of conferences at the end of last year and the start of this year where I met up with friends and colleagues that were incredulous that I was charging 7-8x what they were charging for a day.
So we have to pay close attention to where we are setting our prices from the jump.
Underpricing is a big challenge.
At the same time, overpricing is also an issue in places where I spend a lot of time like sports business.
Before the pandemic, we saw a lot of pricing that may or may not have had any theory attached to it, but which felt like folks were just sticking their finger in the air or consulting their Magic 8 Ball to decide.
This was leading to a lot of bad practices like heavy reliance on discounting, flooding the market through the secondary sites, and tons of empty seats.
While I’ve looked at the data enough to know that underpricing is a bigger challenge, I also recognize that overpricing is an issue and can open the door to poor pricing habits later, like discounts.
Setting pricing more wisely at the start is both art and science, but there are tools available like dynamic pricing tools for tickets, using experimentation with pricing on your site, the pricing thermometer, and more.
The thing I’ve learned over the last four years is that pricing right is essential to driving profit from the start and that overpricing and underpricing create challenges for different reasons.
Second, increase perceived value.
Still the same.
The thing about the perceived value you offer your customers is that it requires you to have a market orientation from the start.
One idea that I’ve become more and more focused on is helping people become more customer focused in their efforts.
It drives profits.
Helps with product development and innovation.
Makes retention of customers easier.
In putting my eggs in the basket of perceived value, I recognize that you have to know what the product or service means to the customer, how they value it, and what your competition looks like.
Not hard, but not simple either.
Finally, bundles to hide discounts.
Don’t discount, hold the line.
But if you do need to find a way to goose the sales, bundling things together can give you a goose of revenue.
The idea of bundling ties into perceived value for me.
As in, you take two things that have value, mix them together and charge a new price.
By combining things, you likely can increase the perception of value.
This is a trick I teach people when we talk about pricing and getting people to pay for consulting and services, add some things that you can do easily or for free that will have high perceived value and help you justify your pricing.
Think workbooks, webinars, document review, or something else that likely helps you deepen your relationship, add value, and grow your business.
In looking back at the discounting for dummies post, I’m surprised how much of my thinking was hit on the head to begin with and how consistent it still is with best practices now.
But have you changed your mind about discounts is the more important question?