Discount Pricing Strategy – Dissecting How and Why (2024 Update)

While the customer scours the web and local stores for the best deal on the products they require, so too does the retailer. Price will always be one of the crucial determining factors of whether a customer chooses one particular retail over the others, so it better to have the best deals available for any specific sector even if that means not having the lowest prices. Discount pricing strategies are about to attract new clients, keep old clients; and keep the revenue flowing in. But what is a discount pricing strategy and how should you implement one for maximum results?

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Pricing strategy is an essential part of running a retail business. Structured pricing is necessary to ensure that the company makes a profit, or at least breaks even.

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Structuring a Discount Pricing Strategy

Pricing strategy is an essential part of running a retail business. Structured pricing is necessary to ensure that the company makes a profit, or at least breaks even. We can visually represent the structure of how to achieve a pricing strategy with a waterfall diagram, which allows a company to see where they can make cuts, where they can see opportunities for additional discounts, and how to adjust their other pricing to accommodate any further reductions in price.

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The image is a waterfall diagram that shows a basic breakdown of a pricing structure. While it is somewhat simplified, it shows that pricing structure requires many expenses be built into how a pricing strategy is constructed from the “cost” to the “profit.”

Why Implement Discount Pricing?

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It is an important question. Why should any retailer practise discount pricing? There are several reasons for implementing a discount pricing strategy, and they aren’t all obvious,

1) Cementing relationships with existing customers

2) Attracting new customers

3) Increasing sales

4) Reducing inventory

5) New Product Launch/Introductory pricing

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The critical part of deciding whether to implement a discount pricing strategy is to define the end goal. If you don’t know what you want to achieve by using discount pricing, you can never tell when or whether your discounts have had the desired effect. Consequently, without a goal, you don’t know when to stop discounting.

The metrics of success with discount pricing are almost as important as the reason for discounting in the first place. Without measures of success, you cannot quantify the achievement of the discount process and learn whether or not you have achieved your goal or missed entirely and ought to try another method.

How will you know if you have attracted new customers or retained old ones? Visible metrics for reducing inventory and increasing sales are easily counted. Likewise, counting up increased sales for a discounted new product launch and comparing it to projected sales at full price is another easy win.

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Discount Pricing Methods; Matching your channel to your goal

Once you have your motivation for engaging in a discount pricing strategy, then you have to choose the channels you will use to achieve the goal. There are many different ways to approach discount pricing, some are specific to a goal you wish to complete, and others are more generic – covering a broad base of business goals. Below I’ll go through most of the common discounting methods and the purposes they are best suited to fulfil.

SEASONAL DISCOUNTS –

Seasonal discounts are an expected part of the annual retail calendar, especially in sectors that have seasonally affected product trade. Apparel and DIY retailers are two prominent sectors in which seasons change the products that they regularly sell. When seasons reach the halfway point, customers are less inclined to pay ‘full-price’ for something that will go out of fashion or is consumable or perishable.

Seasonal discounts are frequently used to increase declining sales and attract new customers

PROMOTIONAL DISCOUNTS –

Promotional discounts usually imply a very short-term offer, valid for only a day or weekend. There always has to be a reason for a promo discount. The reasoning could be an end of season stock clearance, a special offer over a public holiday weekend (when people aren’t working they are more likely to go shopping), or a promotion centring around an event (the football World Cup or the Olympics are often used as a reason to hold a special offer). The London Olympics in 2012.

LOSS-LEADERS –

Loss-leaders are often ‘initial’ purchases that entice shoppers to the store. Loss-leaders should be implemented carefully because their very nature excludes any potential for profit; a business has to gain that lost revenue back from associated sales. An excellent example of a loss-leader was the X-Box. The cost of development and production of the X-Box was higher than the retail price, but they implemented it with the knowledge that the profit margin was significantly higher on the games. Who buys a games console without any games to play?

*Loss-leaders are a great way to attract new customers, entice returning customers and boost sales

QUANTITY –

Quantity discount pricing models work on the principle that retailers will be able to buy a single product in larger volumes at a discount. Instead of passing that discount on to the customer on a 1:1 ratio, the retailer passes on a fraction of that cost reduction by enticing the customer to buy more than initially intended. Typical uses of quantity discounting are Buy-1 (or 2)-Get-1-Free offers and offers that indicate greater discount with the more items purchased. For example, one polo shirt costs €7, two will cost €12, three will cost €17, and so on, sometimes going as high as five of the same item included in the offer.

*Quantity discounts are useful for reducing inventory, but they can also be great for boosting sales, and attracting new customers.

BUNDLING –

Bundling is another form of quantity discount pricing. However, whereas quantity discounts usually focus on a single product, bundle prices discount generally over a range of complimentary items. In the apparel trade, bundling can often be seen in the discount offered to men and women buying suits and workwear, or children’s school uniforms. Another example could be in the gardening sector, selling a “set” of garden tools for less than the individual component prices.

*Bundling discounts are an excellent method of reducing inventory, but they are great for rewarding loyal customers, and attracting new customers.

PRE-PAYMENT –

Pre-payment is an obvious choice in the realms of emerging technologies and eagerly anticipated new releases. If the pre-payment refers to a restock item, retailers protect themselves from revenue losses through failure to collect by getting a customer to pre-pay. Adding a discount as an incentive for paying in advance is just good business. When pre-paying for a new product launch, the customer gets the benefit of knowing they will have one of the fist items available AND the discounted price.

*Pre-payment discounts are perfect for new product launches. They can also work to attract new customers, and cement relationships with existing clients

LOYALTY –

Loyalty discounting may not even be a discount per sé, but a collection of points on an account that will eventually lead to a discounted purchase amount. It is an ‘invisible’ discount, that is, it isn’t an obvious benefit or offer to anyone who isn’t already a regular customer. It usually works by adding points to a customers account for every purchase they make. Some stores have leveraged this for discounting only loyal customers, but others also use the information to obtain shoppers’ buying habits and to implement personalised marketing and discount vouchers.

*Loyalty discount pricing is a perfect tool for cementing the relationship with their existing client base. However, a carefully considered and well-marketed loyalty scheme can be an attraction for new customers, too.

MEMBERSHIP –

Membership discounting is a similar approach to loyalty discount pricing. However, there is a significant difference in that while loyalty programmes simply reward their customers for returning, membership tends to require a „membership fee“. While loyalty points keep stacking up for as long as the customer returns, membership incentivises a customer’s return to a particular store or chain because they have already invested in the club.

For example, a children’s apparel chain has a membership card; you can purchase a one-year or two-year membership for a nominal sum, €30 for one year and €45 for two years. It costs the customer to join the club, but they get immediately apparent benefits. Every parent knows that when the next season rolls around, nothing from the previous year will still fit, so investing in a discount card and buying a whole new summer or winter wardrobe for the significantly discounted price makes a whole world of sense.

*Membership discount strategy is the perfect example of maintaining relations with existing clients. A good membership discount scheme that is well marketed will also work in attracting new customers via word-of-mouth.

FREE SHIPPING –

Free- Shipping has flagged as one of the leading value discounts when online shoppers compare websites. In past years, people didn’t think to compare shipping costs and add it to their order total. Nowadays, shoppers are far savvier and regard free shipping as a determining factor in their decision-making.

*Free Shipping is catch-all for keeping old customers, attracting new, and also potentially boosting sales in a small way – people that don’t have to worry about shipping costs and weight are more likely to spend that little bit extra in their order.

SERVICE EXTRAS –

Service extras will cost your business, but offering maintenance, warranty, and installation guarantees to customers for free will signify significantly added value. Service extras are commonly implemented in retail sectors where purchases are infrequent and usually more expensive than their regular monthly outgoings. Industries such as the auto trade, white goods, and furniture are recurrent users of the added service extras.

*As this is a discount offer generally used with infrequent purchases, it is primarily an attraction to new customers. However, established businesses that routinely implement service extras in their high-value sales will see customers return the next time they need to make a significant purchase.

Discounting done wrong

Yes, a discount pricing strategy can be a fabulous tool to attract and keep customers, reduce inventory, launch a new product and boost sales over the short-term. However, regular price discounting can be a detrimental tool when it is overused.

Seasonal sales are expected, as part of the annual retail calendar, but some business benefit from not reducing at expected times or postponing their discount periods. In sectors such as furniture and white goods, there isn’t any significant seasonal shift; people buy these items when they need them rather than on a seasonal whim.

Promotional discounts should be unexpected and only used when there is a significant indication that making further price reduction will boost revenue or steal clients from a competitor.

A predictable discount pricing strategy has the power to damage brand reputation and perception of value, as well as reducing the possibility of selling at your full-price level. Continuous discounting leads to perceptions of reduced quality and value in the customer’s mind. Additionally, if reductions are predictable and too frequent, buyers will be convinced that they merely have to wait a brief time before the business has yet another sale or promotional event.

Creating an effective discount pricing strategy is as much about when NOT to discount as it is about the price reduction. Knowing your customer demographics and tailoring your discount pricing policies to those specific personas will assist you in making the correct price reductions at the right times.

It may be that your target demographics and your actual audience don’t tally with your pricing and marketing strategies. Instead of discount pricing we recommend going for price leadership.

Why discount pricing is worth the effort

Some brands and retailers thrive without relying on significant discount pricing strategies. Instead, they leverage alternative methods to add value, such as service extras, free shipping, and loyalty schemes. These subtle discount strategies allow them to maintain premium prices while providing customers with a sense of added value and quality. By prioritizing an exceptional all-around experience, price, and service, these businesses build a strong reputation that attracts customers seeking both quality and favourable prices. Continuous and overt discounting can damage the perception of quality, leading to reduced sales and expectations of further price reductions. It is crucial to develop a discount strategy that aligns with your business, appealing to the customers necessary for success. Ultimately, the perceived value in the eyes of your customers is paramount.

For example, imagine a luxury clothing brand that doesn't heavily discount its products but offers complimentary alterations, personalized styling advice, and exclusive access to limited edition collections for its loyal customers. This approach creates a perception of exceptional value and elevates the overall customer experience, allowing the brand to maintain premium prices while still offering a compelling deal.

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