To Discount or Not to Discount, That's The Question

In 1887, Coca-Cola introduced a marketing strategy(that was innovative then) to create a buzz about its drink. They used to collect names & addresses of people (from pharmacy owners) & send them coupons. Using the coupons, people could get a free glass of coke. That campaign helped Coca-Cola become viral. Little did Coca-Cola knew that their coupon strategy will change the face of future commerce.

Today, almost every marketer swears that discounting is a great way to:

  • Acquire new customers
  • Retain existing customers
  • Boost demand or sales
  • Get rid of old inventory
  • Compete against competitors
  • Gain market share

In fact, as per a stat, 93% of the online shoppers use coupon codes or deals throughout the year.

And, on the supply side, brands love giving discounts. They know its a great way to boost short-term sales or achieve sales target. However, discounting, as a sales strategy, shouldn't be overused. Let me explain why.

Discounting, though un-intentionally, reduces the perceived value of your brand or product. Do premium brands like Apple run discounts? Have you ever heard of black friday deals on Apple products? No, you may not have.

In short run, discount may boost your sales. But the same has an adverse effect on your brand value & its positioning. If you position your product as premium, then discount may not a viable strategy. From profitability point of view, discounting is always harmful. But most marketers are cut-off from the finance part, so they don't care about it. As long as sales flow happens, they're happy & so is the owner of the brand.

And, discounting also makes your customer more reliant on low prices. So, if you sell her an upsell item, she would again expect discount. If you sell her a new product you just launched, she would again expect discount. If you sell her a cross-sell product, she would again expect discount.

Once a discount, always a discount. If that happens, you're not attracting your customers based on how remarkable your product is. Instead, you're solely dependent on your discounts to drive sales.

So, what gradually will happen is that you'll start to ignore your product & focus more on pricing. That's a recipe of disaster. You may sell more, but you won't be able to build a sustainable brand that delivers superior value.

Have you heard of Udemy? They're one of the largest online course marketplaces. Each course is priced separately. Google it & open their homepage. Look at the top bar. Are they giving you an "urgent" discount? Here's the thing: You'll get the same discount even if you visit after 1 month, 3 months, 6 months or a year. They're purely a discount-driven marketplace. I mean, who on earth sells $ 100 online courses at $ 10? They do it everyday.

I'm an affiliate of Udemy & therefore I know a thing or two about their marketing. Whenever they run a seasonal discount(over & above their normal discounts), I've seen sales soar like anything.

May be it's a great strategy to acquire customers. "Let us acquire customers then we'll think about other stuff later.". But, what about the quality of customers? Will the $ 10 freebie seekers ever buy a $ 100 product? I doubt.

What're Udemy's competitors doing? Same.

Go & check LinkedIn learning & Skillshare. They too are discount-driven. Herd mentality? May be. LinkedIn offers one-month free trial & then you've to pay just $ 19.99 a month to access ALL of its courses. Yes, all. Skillshare, on the other hand, offers two-months free trial & then you got to pay $ 15 a month to access all its courses. Yes, all, again.

There may be even some cheaper ones that I've no idea about.

Here's why these companies will perhaps never be able to turn profitable:

Imagine, you decide to create an online course & put the same for sales on Udemy, Skillshare & LinkedIn Learning. Due to its low prices, you'll see more sales on Udemy. Then, one fine day, Udemy decides to focus on profitability & increase the rates of all its courses. Soon, you'll see students migrating from Udemy to Skillshare. Hence, you'll start seeing more sales on Skillshare. Then, Skillshare also decides to go the Udemy way. Now, you'll see students migrating from Skillshare to LinkedIn learning. Yes, you'll see more sales on LinkedIn. In the meanwhile, what happens if a new marketplace comes into picture & decides to sell your course for even lower prices than what Udemy was earlier selling at?

This is what I call the "Discounting Trap Cycle". In the aforesaid example, no marketplace will ever turn profitable. As a user, if I'm able to get the same course at some other marketplace for a cheaper price why should I pick you? So, overall the seller (teacher) & the buyers (students) are at an advantage. But, the marketplaces will continue bleeding until they get more funds from the VCs or go bankrupt.

If you would ask me to name one company that I admire the most when it comes to value ratio (i.e value/price), I would say "Zoho". They're a SaaS company with products focused on small business owners. Accounting, order processing, CRM, email marketing, etc. You name it & they've got you covered.

The best part? They're bootstrapped & have never raised a fund from an outside investor. And, its been almost 20 years they're into this business.

If you look at the pricing of all their products, the one thing you're gonna find is that they're reasonable. And, secondly, they don't run discounts. Yes, they do have free trials but I don't consider them discounts (I'll talk more about this later).

Another company that I admire for their pricing strategy is Ghost, a CMS like Wordpress. Their software helps people build blogs. In fact, Bizain itself uses Ghost as a CMS. They're open-source & a non-profit organization. They've been in business for more than 6 years & haven't raised a penny from an outside investor. You'll be startled with the fact they're now touching an ARR (annual recurring revenue) of $ 2 million. All without giving a single discount. They don't even run black fridays or cyber mondays. $ 29 a month as a starter plan isn't cheap. But, the advantage of that pricing level is that it attracts the right kind of premium users. Again, its all about positioning.

The other companies who don't give discounts & are still doing great are SendOwl, Shopify, Louis Vuitton, Whole Foods, etc.

Now, I was wondering if there's a co-relation between outside funds & discount. Its indeed. Most discount-driven companies I researched were heavily funded. That perhaps explains the reason why they continue giving discounts. Deep pockets, yes you're right. But, again, how long can you continue raising funds to fund discounts? If you're a type of entrepreneur who's willing to sell & exit then that's fine. On the other hand, if you're willing to build a strong & viable brand, discounting isn't the right route to go. Instead, focus on your product & customer experience.

I love studying SaaS companies. They give me so much material to write about :) . On the discounting front, most SaaS companies offer seasonal discounts. Apart from that, it's also common to find discounts on annual payments.

Discount is also a favorite of new SaaS companies. They use the same to acquire "early-adopters". I'm fine with that. Lower prices will attract a lot of initial customers who'll provide valuable feedback about your product.

The interesting part is that most SaaS companies rely on the following three pricing models:

  • Free Trial
  • Freemium
  • Demo

Free trials mean you can try out all features of a product for X number of days before commiting on a purchase. I don't consider Free trials as discount. Why?. Because they're a marketing tactic rather than a pricing tactic.

Free trials helps you to showcase your products to your potential customers. The idea is to "try out" or get a "preview" of the product & not discounting.

On the other hand, freemium means you can opt for free plan for lifetime (as long as it meets your needs). Of course, there's a premium plan with more features & freedom.

The popular email marketing service MailChimp uses the freemium model to attract new customers. But, is it really discounting? I think so. Because freemium users may not even upgrade to a premium plan in their lifetime & still continue to use the product. And, that will cost you money in terms of server, support & maintenance. So, basically, you're allowing free plans users to use your infrastructure free of cost. That's discount, of course.

To get the best out of the freemium model, companies need to funnel users effectively through to the premium tier.

For example, MailChimp doesn't offer the autoresponder sequence (one of the most important features for an email marketer) as a feature of the free plan. So, if your business grows & you feel the need of an autoresponder, you perhaps will upgrade to the MailChimp's premium tier.

Lastly, the demo pricing model involves offering a live demo or presentation of your product to your potential customers. Companies offering demos don't generally display their pricing upfront. Instead, you'll be offered a custom plan on completion of a demo or chat with the sales representative. This model is primarily used to sell high-ticket B2B software or solutions.

When it comes to discounts, how can I forget writing about eCommerce companies.

In fact, the biggest eCommerce retailer, Amazon uses discounts every now & then. When you see original price struck off & a new lower price shown, that's discounting. Amazon also offer special deals(over & above the discounted price) on some special occassions like festivals.

Discounts on an eCommerce store can either be given in the form of a coupon code or it be automatically applied on product pages or checkouts. Some eCommerce companies also give conditional discounts meaning you'll be eligible for discount if you meet a threshold like total order value, number of quantities, etc.

Have you noticed the timing of conditional discounts? Most eCommerce sites will not show you the discount code until unless you're about to leave their website without taking any action. This a widely used exit-intent marketing tactic. In fact, I sometimes visit an eCommerce store & purposely try leaving the site to get a discount, LOL.

Some even give discounts to people who've entered their order details but didn't complete the order for some reason. In those cases, you'll receive a nice email (after a few hours of abandoning the cart) with the discount code inside.

Are these eCommerce companies also trapped in the "Discounting Trap Cycle"? Yes, I think so. Applying the same theory, the sellers at Amazon are also sellers at other marketplaces like eBay. So, ultimately, the consumers will prefer a marketplace that provides them with the cheapest price for the same product.

A great way to avoid discounting & thereby improving profitability is by creating or selling unique products. Sell something that can differentiated. Something remarkable, valuable & yet different. That way you won't feel the urge to give discounts every now & then.

Example: If you're planning to launch an eCommerce marketplace then go for an exclusive tie-up agreement with interested sellers.

Example: If you're planning to launch a stand-alone eCommerce store, try selling disruptive & unique products that can't be found on marketplaces like Amazon. I know some niche fashion businesses who follow this principle & have seen success. If you're into fashion, things become a bit easy because designs are always differentiable. You can always "Hey look, we're charging premium because our designs are unique". Makes sense?

To conclude, I feel discounting is a useful marketing strategy when it comes to launching a new product. Other than that, you should limit your discounting only to seasonal events. Focus more on your customers' needs & improve your products accordingly.

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