Pricing Strategy and the Dangers of Discounting
Richardson & Richardson Consulting
Pricing services can be challenging for new business owners and seasoned entrepreneurs.
Business Owners That Changed Pricing Strategy During the Pandemic
Did you change/lower your prices during the Covid-19 pandemic? I’d love to learn more about how you landed on the pricing, and if you were able to “right-size” the deal afterwards. If you’d be willing to discuss your experience with me, please connect with me on LinkedIN. I’m currently working on a collection of business owner lessons from the pandemic – both good and bad.
If you’re open to sharing how changing pricing strategy during the pandemic had a positive or negative impact on your business – and what happened next – please schedule an interview with me here!
How Can A Discounting Pricing Strategy Hurt Your Business?
Are you thinking about offering end of quarter discounts to boost sales?
Has a prospective vendor offered you a sweetheart end of quarter deal?
Think twice before you offer them, and twice more before you accept one.
Read on to learn why offering a discount may not be the best approach. If you need help with pricing, reach out to Richardson & Richardson for expert advice.
The Downside of Buying Discounted Services
Taking that end of quarter discount might seem appealing, but it can harm your business.
Consider your own business: When would you consider selling your product or service for less?
- When you have already artificially inflated the cost of the service to account for discounting
- When you need more cash flow than you have
That deal you’re considering means one of two things:
- The price they offered you first has such insane margins that they’re still making great margins offering the discounted rate
- They’re struggling financially
Nobody offers a discount unless they need to. So, before signing a long-term agreement with a company that is scrambling to “hit their number” for the quarter, remember that if a deal is offered today, it will be offered tomorrow, too.
Who suffers when a company can’t find money post-discounting to staff properly? How are they going to support the new customers who are paying less? While all customers will experience the impact of an understaffed or underfunded company, the discounted clients (that’s you, deal taker) are less valuable to the company. If I, as the business owner, have to decide who gets what, I’m going to prioritize the most profitable clients – I need to keep them.
The Drawbacks of Temporary Discounting
Once you’ve made that offer to discount, you’ll never get that prospect to on-board at the original rate.
It’s important to understand the effects of discounting on customer loyalty and profits.
- Offering discounts can lead customers to expect them permanently. This can result in lower profits, as customers pay less.
- Discounting will reduce profit margins, impacting overall earnings for not just this quarter, but for years to come.
- Adding more clients at reduced rates leaves less profit.
Discounts drive purchases based on price, not value. A company that buys on price will leave on price – don’t assume you’ll ever get that customer up to full rack rate. Expect them to leave. It may not be a great pricing strategy.
If you’re the discount taker, remember that the first clients that get “Pumpkin-planned” out of a businesw are the less profitable ones. If you think trying to get rid of your low-paying, high needs clients is challenging, imagine now that you’re on the other side of the table, scrambling to find a new provider for an important business service. No matter what side of the table you’re on, discounting can impact your business operations negatively.
Listen to Dave Cava talk about “The Pumpkin Plan for MSPs” on the WIN Podcast!
Types of Discounting Strategies
Understanding various discounting strategies is key to effective pricing.
- Percentage-Off Discounts: Common and effective, this involves reducing the original price by a percentage. Be cautious, as overly large discounts may lower profits.
- Bundling: Offering multiple products together at a discounted rate can increase sales volume and loyalty. Tailor bundles to meet customer needs.
- Buy-One-Get-One And Other Offers: Encourage additional purchases by offering increased value through discounts. Ensure the deal maintains profit margins.
- Sales Promotions: Events like competitions and flash sales can boost traffic and sales. Use them with caution. Relying on them may harm long-term profitability.
The Pros and Cons of Discounting
The pros of discounting are limited to short-term increases in cash flow. A discounting strategy considered prior to business launch may include pricing with some “wiggle room” for offering discounts, while still staying profitable.
While discounting can boost sales, it’s croocial (see what I did there?) to consider the drawbacks.
- Discounts can attract bargain-hunters, and you can burn a lot of time and treasure talking to prospects that don’t see value in your services.
- Discounting can make it difficult to differentiate your business – when you are focused on price instead of value, you can quickly race to the bottom.
- Excessive discounting will devalue your products or services over time.
- Frequent price reductions can lead to financial instability.
The Pros and Cons of Taking Discounts
When you’re sitting in the buying chair, consider the impact that offering a service for that much less would have on your own business. Think about any scenario under which you would make a similar offer. You can take that deal, but consider what a relationship with a firm that is offering deep discounts will look like in the future.
I know a lot of large companies who dropped pricing aggressively before they exited – their goal was to inflate their value as much as possible – profitably or not – before getting to the closing table. If someone is offering you a too-good-to-be-true-deal, it probably is too good to be true. They may be planning to sell soon. When the buyer comes in, they’ll cut costs to return to the original desirable margins. You end up with a business partner with fewer employees available to support you.
For a smaller business, discounting usually isn’t strategic. It’s done out of necessity. A financially unstable SMB partner is a bad partner.
Crafting an Effective Pricing Strategy
Creating the right pricing strategy is essential for profitability. Start by understanding the value your product or service offers. Analyze competitors’ prices to stay competitive without sacrificing profit. Consider long-term plans like subscription models for stability. Test different pricing models to find the best fit for your business.
Sound challenging? It doesn’t need to be.
Professional Pricing Advice
Professional assistance can be used to develop a successful pricing strategy. Richardson & Richardson can offer insights into market dynamics, competitive positioning, and pricing psychology. If you could use some assistance building pricing models that lead to long-term success, book a call with us.
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