How To Balance Discounts with your Pricing Strategy

With another holiday shopping season (and post-holiday clearance) in the rearview mirror, online retailers are taking down the sales signs and getting back to business as usual.

Although business may become out of the ordinary for some, that sales spike can shoot as high as Mount Everest and can fall like a rookie snowboarding down it. None of those customers that were hooked by your Buy One Toaster, Get Three Bread Loaves Free deal came back for more dough.

This shouldnt be surprising. According to a Coherent Path study, shoppers whose first purchase is induced by a discount are 50% less likely to make a second purchase. Lower prices rarely lead to brand loyalty, instead they attract smart shoppers who jump at the opportunity.

Its understandable to consider sales an unavoidable part of modern retail. Competition is steep and a click away, but like that middle school motivational speaker said, Take the hard right over the easy wrong. Heres why constant sales are the easy wrong.

They Condition Shoppers

We have all heard of the story of poor Pavlovs dog, who would only become hungry after a bell rang.

This principle applies to customers who only get excited about shopping at the prospects of sales. Sales are so ubiquitous that studies show shoppers discounting the discount; they look at a 50% off sign and assume the retailer is really only selling it for 40% off. This shows how little faith shoppers have in retailers.

Sales not only make customers question the retailers motivation, but also train them to look for ways to game the system. For instance if customers realize you have consistently poor forecasting and always end the season with a clearance, they will just wait until the end of the season.

And for non-perishable goods, they will stock up to tide them over until the next sale. Selling can be reduced to a negotiation; if youre known for sinking your price to get a sale, word catches on and people become patient.

Aside from getting customers into unprofitable habits...

Sales Devalue Your Brand

Pop Quiz: Whats more valuable, something received for free or something received for a little bit of money?

You would think that even a small dollar amount attached to a product would make it more valuable than something you sacrificed nothing for, but a study from the Journal of Consumer Research would tell you to examine this riddle more closely.

Participants bought a jar of tomato sauce; half were given a box of spaghetti discounted to just 50 cents, the other half received the box of spaghetti for free. When asked to value the box of spaghetti, the group that received it for free estimated it having a higher price than those who bought it at a discount.

In this situation, the free addition seems like an act of goodwill by the company whereas the discounted good seems like an attempt to offload inventory. This is not the intended perception when discounting goods, though it does have that consequence.

Balancing sales with your pricing strategy

Special offers still have their place in any pricing strategy, but retailers should focus efforts on sales that complement long-term strategies. Like in the study above, focus on offers that will build customer loyalty. If you show yourself going the extra mile for your customer, it is more likely customers will recognize this as the reason they keep coming back and not your flashing neon sale sign.

Tracking competitors is also a great way to monitor your brand positioning. In order to keep a consistent brand position when the market changes, you need to adjust your prices to follow the market fluctuations. Employing a rule-based pricing strategy to remain a certain percentage above a competitor can protect your brand value while staying in a reasonable market price range.

Like kale and hard alcohol, sales are very effective in moderation, but abuse them and you start annoying those close to you. As long as your sales and offers play an important part in your long-term customer acquisition strategy, you should find a balance between short-term sales and long-term customer retention.

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