Russell Streeter

Discounting: The Enemy of Profits

Everyone loves a good deal.

While haggling over price is not so common in retail in Britain, shoppers can be easily swayed with discounts and bundles. And the consumer has (nearly) all the power these days, so they can shop around for the lowest price. 

Does that mean that your business must always offer the lowest price?

Yes. And no. The clue is in the word “deal”. 

Your customers are not looking for the absolute lowest price; they want the lowest price for the highest benefit. In other words, the best value.

So why is there this obsession amongst small businesses to offer the lowest price? Because they think they have to. But I’ve said this before and I’ll say it again, as many times as I need to: as small businesses, we cannot afford to compete on price alone. There will always be a competitor that is able to squeeze their margins a little more, has a more efficient business model, or who has lower profit ambitions than you. 

You MUST offer superior value to any of your competitors.

Take the example of two restaurants on a high street, both offering a 2-course meal for £50. The first restaurant decides to offer a £10 discount, in order to attract more customers. 

The second restaurant takes a different approach. They offer a free desert worth £10 and bottle of wine worth £10. Now they have a £70 meal selling for £50 and hence the customer perceives much more value in this offer, when compared with restaurant 1. 

The best part is that the actual cost to the restaurant of giving away a free bottle of wine and desert is £10. So both restaurants are offering deals that cost £10 per customer, but restaurant 2 is offering much better value.

The key to adding value is determining what your customers and target market perceive as valuable. You must understand their needs, wants, troubles and inconveniences in order to entice them with solutions through added value products or services. Adding value will add to your profits, but if you don’t focus on genuinely helping your clients, you’ll have a difficult time attracting them.

Added value works for both product- and service-based businesses. If you offer a service, like hairstyling, try treating your customers with products like a latte while they wait, shampoo samples, or a free conditioning treatment with every sixth visit. If you sell a product, consider offering convenience services – like free shipping or delivery – to make the customer’s experience a seamless one. The customer will feel appreciated and their needs will have been taken care of.

For those of you who still think that discounting is the only to compete in a crowded and hyper-competitive marketplace, let me tell you about one of my clients. 

Grace Haine Eyecare operates in the ultra-competitive optical market, providing sight tests, spectacles, contact lenses, etc. This is a market in which the likes of Specsavers, Vision Express and Boots command the bulk of the business. This is the market in which seemingly no-one pays for an eye test; in which you can buy your contact lenses online a rock bottom prices; you can even buy reading glasses in a well-known discount chain for £1.

The national brands, and even some independent chains, are always offering 2 for 1 deals on frames. And yet Grace has never offered a free eye test to new patients. She sells some of the most expensive frames on the market, and she never offers a discount. 

(Actually, that’s not quite true. She offers a 25% discount to patients who join the customer care plan. They pay a monthly fee for the privilege, thus ensuring their continued patronage for many years to come.)

Grace is able to this because she knows her market (predominantly over-50s) and she knows what they want. For example, her appointments are 40 minutes long and, while you and I might find that excessive, Grace’s patients value the unhurried service, the extra time they get with the optometrist, and the chance to discuss any issues that may arise during the testing.

Of course, from a medical and regulatory point of view, all opticians provide a perfectly satisfactory service. Yet the fact that Grace’s patients make the choice to come to her practice, and pay more, is an indication of the higher perceived value that she offers.

Discounting is a lazy strategy. You should only do it if you have a low-cost, entry-level product and you want to encourage prospects to become customers, so that you can sell additional and follow-up products and services. Examples of this are razors (the blades are extortionate!) and printers (ditto the ink and toner).

But you need to a mental decision to stop competing price alone. I can give you lots of good ideas, but in the end you need to say to yourself, your team and your clients, “we are better than that!”