Deadly Discounts and How to Avoid Them

Discounting is the new marketing trend.

Groupon is reported to be the fastest growing company ever (ever) with 5 million users in the UK and even more worldwide. Other copy cat business models (Itison.com, KGB Deals, LivingSocial) have quickly followed suit in what is ultimately the next land grabbing gold rush of the ecommerce landscape.

But business owners beware. Discounting is both a marketing science and an art. One which, if not thoroughly thought through, could backfire with catastrophic circumstances.

Over the past few weeks I've had many philosophical discussions with clients about Groupon and its ilk. Many of these discussions are tinged with fear and suspicion. But discounting is a viable, and arguably clever, marketing strategy. Tesco's are the king of the discounts and it hasn't done their business any harm over the last few years. 

So here's the deal on the deal. Here's how to make sure it works for you.

Assess Capacity and Demand:
If you are in a service business, your marketing has to be ALL about creating demand and maximising capacity. Failure to maximise capacity and you lose money. 

For instance if you've only sold enough hairdressing appointments for half a day, and the other half a day passes, you've just lost half a day of revenue - never to be gained again.

If you can fill that half a day with paying customers, albeit at a smaller value, you are now making more money than you would have been than if you'd not sold anything at full price.

Do NOT discount if you do NOT have capacity in your business. This is where others have come a cropper. Itison.com's Dundee launch sold 5000 Dominos pizzas in one day..... needless to say, thanks to such a great offer, Itison.com had plenty of dough but the pizza shops didn't have quite enough to satsify all those hungry pizza loving bargain hunters.

Assess Profitability and Pricing:
This is the key to success. Discounting is NOT about giving it away at a loss. Roughly speaking, most discounters are looking for the business to give the service away at around an 80% discount on advertised price. So, unless your "mark up" is in the region of 400% your discounting adventure will be costing you money.

But there is a way to do it, at a profit:

• Don't make single service offers - combine services to maximise the use of operational time and increase the value of the deal
• Only put on offers where you have a high likelihood of making a cross or upsell - for instance a service that's likely to result in a product sale, or will need multiple visits (at full price)

Assess Reach and Impact:
There's choice in the marketplace so you don't just have the option of one when it comes to selecting a discounting partner.

If you are looking at discounting as a media channel, first consider its reach. Response rates in the industry are typically in the region of between 0.3% - 2% at most.

In simple terms, if the database of the discounting firm sits at 100,000 total "reach" you can expect between 300 - 2000 people to take them up on the offer. In most cases it's at the lower end of the scale. In exceptional circumstances it may be much higher. But in those cases the deal is a steal.

So if you're not sure you can support the capacity uptake of 500 new customers, consider using one of the smaller discounters. You might only get 50 voucher sales, and only reach 10,000 people, but it might be a better solution for a very small business.

Carefully Consider Frequency:
Tesco discounts all the time. Their business model supports this activity. They either negotiate with their suppliers to get the products at a discount, or they push prices down across the board to ensure they make their profits even though they are offering up bargains galore to customers in store.

Your business is, most likely, not following this kind of discount model. So tread carefully when it comes to frequency of offer. We would avoid committing to more than three deals in any calendar year and the timing needs to be sporadic, rather than predictable. The last thing you want to do is train your customer base that, if they wait a couple of weeks, they'll get it at a 60% discount. There madness lies.

The offer should always be seen as a "treat" or an "exclusive" in order for it to be successful for both you and the discounting site.

Assess Audience Response:
It is very likely that your existing customers will be on the database of the discounting company. So having a strategy that rewards existing customers is a must. Whether it's a loyalty promotion or something simple that says thank you, never forget: these are the guys that, ultimately, keep you in business.