Choosing a pricing strategy is a difficult decision, but one that every business needs to make. Pricing strategy affects most aspects of a business, including its revenue, market share and profitability. As a general rule, low prices are considered to attract customers, making cut price or ‘discount’ pricing strategies increasingly popular. Should your business consider a discount pricing strategy?
What is discount pricing?
At its most simple, discount pricing involves charging comparatively low prices for common products, undercutting other suppliers in the market. This strategy relies on the assumption that demand for a product increases as the price of a product is reduced. If consumers are willing to spend a fixed amount of money on consumer goods, they will be willing and able to purchase more goods if the price is lower.
Discount pricing can be understood as two separate, but similar, strategies: competitive pricing and economy pricing.
Competitive pricing involves reducing prices, perhaps temporarily, on certain key products in order to penetrate a new market and quickly capture a significant share of the market. Quite often, a business that employs competitive pricing will be selling some products below break-even point (and even, in some cases, below the wholesale per unit cost) in order to get customers through the door.
Competitive pricing is not necessarily sustainable in the long run; while it can be a simple way to build up a customer base, competitive pricing can pose a major financial cost to the business. It is also important to remember that a customer base built up by undercutting competitors is likely to be relatively price sensitive, making your business vulnerable to intense price competition once your prices rise.
Economy pricing has a slightly different focus to competitive pricing, with the main idea being to maintain consistently low prices over an extended period of time. Economy pricing is likely to be higher than competitive pricing; this is because an economy pricing strategy involves working out the lowest price that a store can sell a given product at over the long-term, without compromising its ability to cover costs and deliver a reasonable return to partners or shareholders.
One of the key ways that economy pricing differs from competitive pricing is that, for economy pricing to work, businesses need to explore new ways of doing business that enable them to cut costs as much as possible. This may involve leveraging economies of scale, offering ‘no-frills’ options and looking to new models of service delivery, such as e-commerce and low-cost store locations.
Discounting within a non-discount business model
While consistently offering ‘discounted’ or low prices is an entirely new business model, discounts can also be used in other business models to stimulate sales or reward customer loyalty. All but the highest-end retailers use bulk purchase discounts and product bundling to increase sales, rewards schemes to retain customers and seasonal sales to clear slow-moving inventory. These strategies have passed the test of time in the traditional retail context.