Shopify Ecosystem

The Advantages And Disadvantages Of Discounts

the-advantages-and-disadvantages-of-discounts

Tom Simpkins

Tom Simpkins

Content Marketing Manager

Reading Time: 7 minutes

The very notion of a discount promotion was first introduced by Coca-Cola in the late 19th century. They were the first company to experiment with discount pricing strategies, offering coupons that were good for one free glass of Coke.

This simple concept essentially introduced the product to the market, with a wildly high success and engagement rate that saw billions of coupons validated.

Naturally, the prospect of a highly successful campaign such as this would be alluring to many companies. The desire to bring in a wealth of new customers, or to even attract existing customers back to spend more, can lead to an array of different price points and ways to promote them.

However, there is a time and a place for such discounts and promotions. Occasionally, even wild success can lead to damning results. For example, when many consider double-edged promotions, they think of a certain pizza chain’s tattoo promotion.

But we’ll explore that in more detail later. Essentially, the lesson it teaches is that you need to know when you should use discounts—and when you shouldn’t.

Advantages of Using Discounts

We previously referenced the origins of the discount, Coca-Cola’s free glass of Coke promotion. Examining it shows the advantages of a discount pricing strategy.

The original goal was to introduce the beverage to Atlanta, but within years Coca-Cola was served in every state in America. These humble beginnings, starting with the world’s first coupon, was considered ‘insanity’ at the time, yet shaped marketing forever by effectively creating discount pricing as a concept. 

Modern merchants will know that discount pricing is anything but insanity. Rather, it’s an incredibly useful way of driving sales and increasing customer engagement. Whether you’re using discount codes or automated discounts on your website, the advantages of discounts include:

  • Acquiring new customers: Word of lower prices or time-sensitive offers can be enough to bring in new customers. This can be said of both customers previously unaware of a store or brand, as well as customers who haven’t purchased from a store or brand due to prices being perceived as too high.

  • Earning repeat customers: If a store has already sold products to a customer, using discounts or promotions can be alluring enough to bring them back.

  • Creating exclusivity: Whether it’s for VIP customers or used to retain customers, personalized and unique discount codes, even one-time usage codes, can create an air of exclusivity. These discount codes will appear custom-made for the customer with them in mind, offering them a more positive customer experience.

  • Codes help control discounts: By using discount codes, merchants can implement their own restrictions. A discount strategy may be established to sell a certain amount of products and by monitoring how many discount codes are validated, a merchant can have control as to when the codes are active.

  • Getting rid of unsold inventory: Of course, one of the simplest reasons for lowering the price of a product can simply be to make it more likely to be bought. This desire is universal for any product, but if a product remains unsold, discounting it can become the only way to generate enough interest to ship it. This can be caused by a number of reasons, ranging from a product being time-sensitive, such as perishables, to a simple miscalculation in demand.

  • Track conversion performance: By monitoring specific codes and how they’re used, it’s possible to see how your customers are interacting with your website, as well as where they came from. For example, offering a specific code on social media and seeing how many use it will suggest how much of your audience comes through via social media.
  • Improve abandoned cart rates: Discounts offered to customers who abandon their shopping carts can be swayed back to make a purchase. Some customers will even purposefully leave their cart and await a discount to complete their purchase, yet despite customer intentions, it’s hard to argue with an alluring discount. This is why they can serve as an effective cart abandonment solution.

Naturally, it is vital that a merchant knows how much to offer with discounts and engages with a discount strategy wisely. One particularly useful way of ensuring that a discount pricing strategy doesn’t get out of hand is to research competitors, especially if you make use of automated price tracking.

Still, discounts aren’t all pros, as mishandling a discounting strategy can lead to some fairly catastrophic problems. However, before we discuss the potential disadvantages of discount pricing, we should examine an opposing prospect to discounting—premium pricing.

The Premium Pricing Strategy (and How Discounts Don’t Play Well With it)

When considering a pricing strategy for products, many factors come into play. A brand can invest heavily in product quality, a sense of exclusivity, or other elements that make the notion of discounting or lowering their prices contradictory to their marketing as a whole.

This is premium pricing—the creation of customer perception that sets the brand and products as better than and above the competition.

Naturally, a product must prove it is a premium brand, or at the very least, justify it. Whether it’s due to brand pedigree or simply the illusion of higher quality, premium pricing relies on premium products being perceived as greater than the competition.

For example, fashion brands will garner influencer clout and aim for an audience of high spenders and public figures, leading to the belief that only those who can afford high price tags merit wearing their clothes. 

Many fashion brands live by premium pricing, yet none chase exclusivity more than Supreme, who strive for premium pricing so much that customers queue up for a chance to buy something, or anything, even a branded brick, from them.

Premium pricing is designed to create, establish, or maintain a brand’s high value in order to yield high profits and create a difficult target for competitors to meet, match, or overcome. 

In general, it is most effective with the following conditions:

  • Perception of Luxury: Above all else, the prospect of owning the most exclusive or high quality product will always come with a sense of pride for customers. Those willing to pay for a luxurious product will be more likely to back up the claims of high quality. Likewise, with a luxury price tag, a product will call for competitors to try and reach the same price to justify selling their product. This alone can deter competitors from offering similar products.

  • Originality: The ‘no substitutes’ mentality establishes that a product is the first or best of its kind, one that invokes the idea that competitors are plagiarizing the product or brand.

  • Patented: Like the originality aspect, if a product is unique enough (whether it’s via a unique feature or design) it can be successfully patented. With this in tow, a brand can deter others from offering similar products and sell theirs for a higher price.

  • Limited Release: A merchant can choose to make a limited amount of a product, creating a sense of scarcity and exclusivity. 

There are other ways that a product or brand can merit premium pricing, but the bottom line is that discounting prices for products or brands that use premium pricing would be damaging to them and their profits. 

After all, if a brand has established itself as one that’s worth spending a lot of money on, the very notion of lowering prices to attract customers would seem to betray everything it’s built its image on.

This would be a huge disadvantage to using a strategy focused on discount pricing, yet there are others that can apply for any merchant or store—showcasing when not to use them.

Disadvantages of Using Discounts

Just as we discussed the golden example of promotions, the Coca-Cola campaign, we should also consider the infamous Russian Domino’s tattoo campaign as a cautionary tale.

The promotion was conjured to create positive buzz about the brand and lure in new customers to the pizza chain. The very concept of asking people to tattoo the Domino’s logo onto their bodies seemed absurd enough as a promotion. Unfortunately, they severely underestimated the lengths people would go to for ‘100 free pizzas a year for 100 years’.

Source

Within hours, they were flooded with pictures of freshly inked tattoos and had to immediately impose new rules, regulations, and most importantly, restrictions. Ultimately, they landed on a maximum of 350 entrants, so the promotion ended within days—rather than months later as planned.

This shows that even successfully utilizing a marketing strategy can result in potentially revenue-destroying results. Naturally, not all discount strategies will be so detrimental to a company. Sometimes, the strategies will fail and result in losses, rather than crashing and burning like the above example.

These losses come from mishandling discounts or failing to comprehensively understand the disadvantages of discounts, such as the following:

  • Premium Pricing: As aforementioned, discounts can directly counter any perception a customer has of a brand or store. High-end products or those deemed ‘luxurious’ can only be hurt by lowering prices, as it destroys the sense of exclusivity that a high price tag creates. While you may attract new customers, this will likely result in the more royal, consistently high-buying customers to leave.

  • Negative Expectations: Repetitive discounts will inadvertently condition your customers to believe that either your regular prices are a rip-off in comparison to discounted prices, or that you’re only worth shopping from when there’s a discount promotion active. In either case, it will become likely that your customers will simply wait for the next discount and refuse to buy from you when you’re selling products at their normal price.

  • Lower Reputation: If a merchant opts to offer discounts over and over again, it will seem that they have no faith in their products. This lack of faith will then be seen as a lack of quality, reliability, or even desirability for products. This kind of downward spiral is hard to come back from, with customers unable to perceive a brand or product as anything but lesser.

  • Knowing When to Stop: While discounts can be helpful to generate interest or establish a brand or product within the market, failing to remove the discount or doing so too late can overall harm a brand or store. For example, offering a free trial for a service that goes on for too long can make a customer feel like suddenly paying for it is too steep of a cost.

Wrap Up

By considering how your business engages with customers, it’s easy to understand whether discounts are right for you, or potentially detrimental to your goals. 

Sometimes they can be essential and necessary, such as competing with rival stores during busy periods where customers expect discounts. Other times, they can do more harm than good, such as when trying to establish a sense of exclusivity and faith in a product or service.

Regardless of how you decide to market your products or brand to your customers, Omnisend is here to help. From creating interactive and engaging campaigns to crafting quality promotions that speak directly to your audience, Omnisend’s many features makes omnichannel marketing simple.

Special thanks to our friends at Omnisend for their insights on this topic.
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