Wondering how and when to discount? Discounting strategy is something that we love to talk about in the hopes that we will drive additional sales, but will it?
Stop and think for just a moment – when you discount, why do you do it? When I’m working with small businesses, it’s typical that a discount is offered out of fear.
Fear that the client won’t sign at the full price.
Or fear because the client asks to think about your proposal.
Finally, fear that we are overshooting our value.
It’s all fear.
Let’s dive into when you should discount (and when you shouldn’t) as an entrepreneur. You’ll learn how to discount for financial sustainability, so that you can quit leaving money on the table.
The Impact of Discounting
To start, discounting should not be your first line of defense. Most organizations see discounts as a way to boost sales, thinking that we need to offer a discount in order to make our customer feel a win and sign a contract.
But this isn’t always true – pricing research shows us it’s very easy to miss this mark. My own observation is that many small businesses believe more people will purchase, subsequently increasing their bottom line. So, why does this often fail?
Before we dive in, pick a number you might normally discount your offer by. Most won’t pick less than 5%, but might go as high as 30% or more.
How and When to Discount (and Still Profit): A Case Study
First, discounting actually hurts your profit margins. Let’s look at a case study:
You’ve decided to create a course to scale your ability to impact people without trading your time for money. Great!
You price the course at $299 so it doesn’t feel too high, but requires a level of investment. Your direct and indirect costs total $160 – things like your time to make the course at scale, hosting the course and videos, equipment to record, ad spend, e-mail marketing and hiring a part-time VA to answer customer service and billing questions.
This leaves your profit margin at 46% – very healthy for residual income.
Now head back to that discounting percentage you picked just a moment ago. Let’s say you went with 25%. This brings your price down to $225.
But wait – your costs didn’t change. You still owe $160 in direct and indirect costs to make the course.
Your profit margin just fell from 46%, or $139 per sale, to 29%, or $65.
By discounting 25%, you lost over 46% of your profits.
Most people think of their discount as their bottom-line loss. If you discount 5% off, you’ll just lose 5% off your bottom line, but that isn’t true.
Since most profit margins are around 30%, a 5% discount equals a nearly 20% loss in bottom line revenue.
That impacts what you pay yourself, your time, and your ability to grow. It impacts your ability to fulfill your mission.
It’s a heavier hit than most people realize.
Where Is the Discounting Strategy?
If you discount too drastically and without proper pricing strategy, your offer can reek of desperation. This triggers to your audience that what you are offering is not worth the original value you said – ultimately that you didn’t do the proper work of evaluating your pricing and value for this offer. You never want your audience to lose trust in your value as a business.
So when you discount, don’t do it without crunching the numbers and don’t do it out of fear.
So How Do You Properly Discount and Safeguard Your Financial Sustainability?
The key to discounting is to determine the value of your offer, slightly raise the ‘original’ price, then build in a discount to move the offer back to the (hidden) normal price.
Discounting allows for you to price anchor and say a particular offer is normally worth a certain amount, but we’re making this a no-brainer by building in a discount. The best starting place is to determine your real price, then add slightly to it – usually 10%-30% – to buffer in space for the discount.
Will this increase sales for people who wouldn’t have bought anyway? No. And again – that is not the goal of discounting, even though most people think that is.
What this will do is move those on the fence to purchase while also enticing those who didn’t need a discount to feel an even bigger win from your business.
Discounting Strategy Case Study
One business I worked with had an event that was priced at $1,000 but offered an early bird rate that brought the price to $800. To the public, this was a steal at 20% off. To the association, it was really $800 and they budgeted for everyone to pay that amount, and anyone who did pay $1,000 added additional revenue. Psychologically, most shoppers are looking for a deal, so offering a discount allows them to remove the need to negotiate or question every feature of your offer in the pickiest of ways.
When you do discount, do not just offer one discount. If you are going to discount, it is proven that offering two layered discounts moves sales the most for those on the fence.
For example, if you are offering a virtual coaching program for $1,000 and past clients receive $100 off, plus there is an early bird rate at another $200 off, it’s best to stack these from smallest to largest. Do not combine the discounts into one. Which moves you more?
- “Our coaching is 30% off for returning clients by December 1!”
- “Returning clients receive 10% off plus a 20% early bird discount for registering by December 1!”
With the second, it feels like an extra special bonus. Again, put the smaller discount first because a smaller discount at the end will feel anticlimactic. Going from smallest to largest feels like an even greater victory for the price sensitive shopper.
Extra Bonus Tip!
I rarely recommend discounting on services. That is an entirely different pricing strategy, but for service proposals I recommend offering your core offer, then adding on a 10-20% optional add-on that isn’t required but a nice-to-have. This anchors the price of your core offer as a deal and the minimum viable scope of work. Discounting is always best for products, like courses, digital downloads or tangible products we create.
There you have it!
By combining discounts and using discounting as a strategy to move those sitting on the fence rather than mass-scale acquisition, you can keep healthy profits for financial sustainability while serving value to match the price you’re truly charging.