Much more to discount

The mere mention of the word "discount" can conjure up dozens of emotions. For the majority of end users, it is typically good news. After all, it means paying less for the same product, which can't be a bad thing, can it? Well, for some customers who are loyal to a luxury brand, it may suggest a drop in the quality, which, justified or not, can lead to a loss of business.

The psychology behind discounting is as important as the percentage of the saving.

A discount can be seen as a sign of panic, a last-gasp chance to keep the business above water, however, temporarily. It can also be a strategy of maximising the opportunity of otherwise lost revenue. A hotelier, for example, can offer special low-season rates.

Surely it's better to have some paying guests at a lower margin than none at all?

We have all seen the end-of-day cut-price food products in supermarkets, where it makes good economic sense to push perishables at a discounted price rather than see them simply, well, perish. Of course, there's more to discounting than plucking a figure out of the air and displaying plenty of "sale" signage. Timing and planning are paramount. For many start-ups, a discount can be most beneficial before a list price is even established. It can be an excellent way of letting your customers know that you are up and running. An introductory offer not only gives good value for money, it portrays a sense of urgency, a "don't miss out" factor.

If your product is up to the mark, you will build loyalty and reap the benefits when the offer has expired. But, as with all psychology, there is inevitably another side to the coin.

If your business is based on membership, and you promote your discount when the business is already booming, it can create resentment among your existing members who paid full price and may cause them to look for other providers. An introductory offer needn't necessarily be when you introduce yourself. Offering preferable rates to existing customers in return for the introduction of a new one is also a highly effective way of attracting clients.

The premise behind all discounts is – or should be – to introduce, maintain or expand.

But, however obvious it sounds, you need to make sure you don't discount to death.

Can you afford to cut prices or lower rates? Is the long-term gain going to be worth the short-term boost? If your competitor is offering the same product at a lower cost, is there another way to entice new custom?

InterContinental Hotels Group decided as a matter of policy that they would not drop their rates, but instead launched a campaign of non-reduction incentives.

There are competitions, draws and loyalty points which offer customers free weekends, rooms abroad and buy-one-get-two-free deals. They are the largest hotel group by number of rooms, but they refused to discount their prices despite enduring one of the most depressed times in hospitality history.

For smaller companies, such stringent policies may not be an option. Offering discounts can be a great tool for promoting new services in an existing business.

If you already have customers coming through the door for one product, discounting another not only increases awareness, but also increases the perception of good value all round.

A great discount dilemma is how, where and when to promote. The internet has provided the perfect platform for broadcasting discounts and deals and many of the most successful sites are dedicated to finding best rates. Whether it's flights, holidays, or simple shopping, there are millions of discounts all vying for optimum coverage, but the most successful tend to be based on limited time.

Again, the "don't wait 'til it's too late" mentality. If you follow the same thinking, make sure your timing is right. The reason many flights are so heavily discounted is because the costs of having another 10 passengers are negligible. Bearing in mind that time constraints are a valid reason for discounting, there are still potential pitfalls. When Happy Airlines decides that it would be better to have 10 travellers at a discounted price, it may unwittingly build a reputation for cheap last-minute flights. Customers may wait until Boeing is about to taxi down the runway before they finally buy their ticket.

By the same token, what if the supermarket customers decide that it's not worth shopping for bread until the store is about to close? Is it more prudent to discount the remaining loaves or clear the shelves?

If we return briefly to psychology, another fly in the limited discount ointment is how you reintroduce your list price when the offer has ended. There is a fine line between the appreciation of a promotional rate and the dismay at a return to the original. To ease the misconception of a price rise, it is often best to shout from the rooftops that this is a "sale" and it "will end". Again, there is a sense of urgency and the awareness that this is not a permanent price.

If you decide that the time for a discount is right and you have weighed up the long-term benefits and the short-term dangers, remember that it should be to introduce, maintain or expand. If there is a problem with cash flow, look for other options.

If the business is already struggling with profits, a lower margin is going to mean deeper trouble. And, psychologically, you could end up looking desperate.

- The writer is MD of Commercial Finance at Gulf Finance. The views expressed here are his own

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