Pricing Strategy: Discounts & Promotion (Theory)
Now that we’ve quantified our customer segments and created tailored product and pricing tiers, let’s discuss how we might further incentivize customers to buy our product. A common incentivization strategy is to discount the price of a product via a temporary price drop. Typically businesses discount their prices because they want to engage potential and former customers who are not currently engaged, presumably because their prices are too high. But when is this a risky move and when can it be effective? And are there alternatives to discounts that have similar objectives?
Risks of Discounting
Discounting for the wrong customer segment can mean that you are giving a discount to a someone that was willing to pay full price. As a result, you do not drive new sales or attract new customers. A common example that I frequently encounter is the use of “Promo Codes” on e-commerce checkout sites. Even though I’m ready to submit my payment, I’ll take 30 seconds to search for codes, and most of the time I find one that can be used!
An additional risk, and this is a concern primarily for e-commerce, is the ability to resell your product. If you discount the product, can someone easily take advantage of an arbitrage opportunity by buying your product and quickly reselling it to others on a secondary market at a higher price?
Finally, discounting is related to the larger concept of customer engagement. In e-commerce and SaaS, you engage with the same customer repeatedly and discounting trains these customers to expect discounted, lower prices, making it harder to convince them to pay full price in the future.
I’ve found that the best e-commerce discounts are ones that are not scheduled, last for a limited time, have a limited supply, and are tied to your product in a way that can help you advertise aspects of your business.
Customers using SaaS products are typically on a recurring monthly payment plan and giving the first month at a discount as an incentive to try your product might not be enough to retain them in the second month – all you’ve done is train them that there is a lower price out there. If you are trying to overcome the challenge of getting customers in the door to try the product and see its value, I recommend offering your product for a limited time as a free trial and then full price thereafter. By employing this strategy, the customer has the opportunity to experience the value of the product before committing to the full price.
Another place where discounting can make sense for SaaS products is on the payment schedule. If a customer is willing to pay for a full year’s subscription in advance instead of month-to-month, then a bulk discount can be effective. Similar to the concept of the free trial, the bulk discount is best offered as a free month instead of the equivalent value as a discount on the monthly rate so that the customer never sees a lower per month price.
If you are finding that discounting is the only way you think you will can generate business among a certain group of customers, then you might need to re-think your pricing tiers, as we discussed yesterday. There might be a new, low-end tier that makes sense for you to offer.
Promotions, where you are providing something extra, can be a good alternative to discounts, which involve giving the same product for a lower price. This strategy can entice customers without decreasing the value of your product. It also can serve to introduce them to a new product that they might not have tried otherwise, but may like and purchase in the future.
Given all of these risks, how do you measure the effectiveness of a discount or promotion? The key metrics to consider are the number of new customers you’ve engaged with and their churn rate, compared to the cost of running the promotion. If you are not able to reach new customers and sustain their engagement with your product via a discount or promotion, then it is not worth doing!
Tomorrow we will wrap up our pricing strategy discussion by looking at an example for Doug’s Desserts, my hypothetical company.
Recipe of the Day: Cook’s Illustrated Premium Dark Chocolate Mousse (free trial / subscription required; I do not receive any compensation for this link)