A pricing strategy is an important element of a lucrative business. More than any other element, a pricing strategy directly impacts the amount of profit you make. Choose a pricing strategy that helps you meet your sales objectives, enhances your brand perception and provides the best profit point for market demand. A discount pricing strategy is useful for driving traffic and sales short term, however used as a long-term strategy, discount pricing has some negative effects on market position and brand loyalty.
Generally, a business must develop a pricing strategy for a product after performing a marketing analysis. Product distribution, positioning and promotional decisions are made and demand is estimated. A pricing strategy is formulated taking into consideration factors of cost, competition and profit objectives. Possible pricing strategies include a full price strategy, competitive pricing, discount pricing or a mix of these. We will focus on discounting pricing strategies for this article.
Discount Pricing Strategy
Businesses use discount pricing to sell low-priced products in high volumes. With this strategy, it is important to decrease costs and stay competitive. Large retailers are able to demand price discounts from suppliers and make a discount pricing strategy effective as they buy in bulk. It is usually impossible to compete with these retailers based solely on a discount pricing strategy.
Proceed with discount pricing strategies cautiously. Occasional discounts and discounts that reward loyal customers are effective. Discounts used too often begin a downward pricing spiral that may eventually damage your ability to sell the product at full price. For example, if a retailer has periodic large discounts then it may condition your market to wait for these sales, lowering profit margins.
Types of Discounts
It is increasingly common to offer quantity discounts to customers who purchase in bulk and it generally rewards customer loyalty. These discounts can be cumulative, such as discounts given to customers who place multiple small orders or loyalty cards that give a free item after a certain number are purchased.
These are appropriate to reward customers who purchase during off-peak times and often serve to increase sales at the beginning of peak seasons.
Promotional discounts are short-term and used to drive sales.
These are discounted items designed to bring customers into the store in the hope they’ll also purchase more profitable products as well. Loss leaders should be recognised brands that are used frequently. Loss leader items should also change regularly to keep customers coming back.
Advantages of Discount Pricing
Discounts to reward customers who purchase in bulk, repeat customers and employees build customer loyalty. Loss leaders are effective for retailers who need to increase traffic in the store. Promotional discounts, used sparingly, offer temporary advantages including maximising sales, revenue and profit. During a short-term discount period, more units are sold, allowing the company to decrease inventory stock and temporarily raise revenues.
Disadvantages of Discount Pricing
Consider product positioning before choosing a discount pricing strategy. Consumers can often associate low price with low quality, even more true when the brand name is not familiar. Implementing a discount pricing strategy increases the chance that your product will be perceived as lower in quality. While you may gain customers, that make decisions on price alone, other customers may choose competitor products because of perceived quality. Low prices may drive sales for a limited time, but do not build customer loyalty. When a lower priced alternative comes along, you may lose your market share. Competitors can simply match your prices, or beat them. When prices have been driven down to absolute low prices, it is difficult to raise prices again, especially if your product is perceived as being lower in quality.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.