Should you give discounts?

August 14, 2008 - Get free updates of new posts here

Fortunately, my car and motorcycle have both broken within the week. Yay! Now, my mom is driving me to meetings;) Anyways, I was at JP Automotive (car mechanics) and trying to get a deal. Our conversation went like this:


link to photo

Noah: “JP, I am broke, poor and hungry. Please can I get a discount.”
JP: “No.”
Noah: “Dang, why not”
JP: “Discounts mean you are pricing your thing too high. A discount would cheapen the quality and value of what I am providing.”
Noah: Mesmerized.

It got me thinking that some discounts are great cause it encourages you to buy or buy more. Sometimes I think people will buy / pay full-price anyways. As well, I think he has a great point that discounting means you are over-pricing your product and if people want a discount they aren’t appreciating what you offer. What do you think?

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19 responses to “Should you give discounts?

  1. matt snider Reply

    I think you look good in a dress…

    But really, it depends on the market.

    If you offer a service and it is part of your business plan to be good and affordable, then you probably wouldn’t be able to or want to offer a discount. You can compete on quality service for the price. You want to have the best general prices, so find your bottom line and what pricing scheme works.

    However, if you sell products, like DVDs, then the market has already determined a price for that product (the quality is the same). You can again, choose to just offer the lowest prices across the board, but you will loose out against competition who can offer promotional discounts greater than your general low price. So, I don’t believe it would work as well in this situation.

  2. kadavy Reply

    Yeah, hear this all of the time for design services. “We’re a non-profit,” “We’re a start-up.” Generally, I charge what I charge, but have bartered for love and friendship.

  3. Toilet Paper Entrepreneur Reply

    I would argue that it depends. It does not depend on the situation, as much as the type of business you are. If you are differentiating on Price, like WalMart does… discounts are good. They encourage more purchases, and they build trust with the client becuase the client feels the company is doing everything it reasonabley can to lead the competition on Price.

    Now, if you are Nordstrom’s you should NEVER offer discounts. They don’t lead on Price, they lead on Quality. Quality of the experience, do whatever it takes to serve the customer the way they want to be served. If they offer a discount, the customer loses trust for the company because it divereges from the focus on quality. It shows the customer that the perceived value of something has dropped.

    – Mike Michalowicz

  4. Derrick Chiang Reply

    Sorry, JP. Grab a seat and perk up those oily ears. Here comes a quicky econ lesson.

    JP’s “discount theory” holds if and only if every person is willing and able to pay the exact same price for the same service. Discounts do not necessarily mean that JP’s original price is too high. They are simply a mechanism to capture customers who fit into different pricepoints along the demand curve. Discounts done properly can drive higher business volume. So even though the profit margin per customer (minus discount %) would be lower, the higher revenues can increase overall profit.

    It’s like when the Hulk gets a little mad. Sure, he kinda hurts some people around him. But overall, he saves the world from evil.

    That was a terrible metaphor. I apologize. And I ban myself from making metaphors for the next 15 minutes. Now stop looking at me like that.

  5. noah Reply

    Derrick,

    Totally feel what you are saying. I guess the easiest way to explain JP was that he doesn’t use the internet. A few things about economics, theory is much different than reality. And the graph does not take into account quality, retention, perception and such of vendors. Overall, yes you should give some discount but I liked his perspective, nonetheless.

  6. noah Reply

    matt,

    again, totally think you are right on the money. offering a discount allows you to price discriminate to increase your overall sales and theoretically profit. i guess you discount the place that gives you a discount. for example, sports basement. that place ALWAYS gives discounts. so i would not even shop there unless i had a discount available to use.

  7. Jared Reply

    I used to work in the clothing industry and had partnerships with discount stores to sell old stock when inventory was high. It seemed that a precedent had been set in the industry that you needed to sell your stock for at least 50% off the normal wholesale price, since these retailers needed to sell to the consumer at 50% off standard retail prices.

    I’m sure this system works for the huge giants such as Polo, CK, etc, but for smaller companies, you either brake even or take a loss. To counter act this at times we would just mark up our normal wholesale price on paper, so after a 50% discount, we were at least turning a small profit.

    The worst was the giant chain stores that just expected you to lose money. It was as if they were doing you a favor buying your stock below cost.

    So to answer your question, as a former rag trader, I hated discouting merchandise, and the expectations that were the result of previous discounts. As a consumer however, I love discounts, so it’s kind of a love-hate relationship. But I do agree with Derrick’s comment, it’s just that sometimes discounts can get out of control. So how do you fix this if the discounting becomes too much?

  8. Sean Tierney Reply

    It’s dependent on so many factors I don’t think you can make any kind of blanket statement that “discounts are a bad idea.” There are situational variables, industry-type variables, market variables and business character variables to consider. Derrick is right that discounts can be an effective card to play to close deals and improve revenue. Sometimes it may make sense to sacrifice profit for deal volume depending on the situation (ie. need to show a bunch of sales to demonstrate traction, etc).

    We’ve experimented with discounts and learned a bunch. You should always build up the value rather than discount the price if you can but we’ve rescued a month when we had lagging sales by running a promo. Like anything, as long as you don’t abuse it, it can be helpful.

    sean

  9. Devin Reams Reply

    I’ve heard this from business a lot, actually. Talking with the marketing guy at Chipotle, he said the same. You’ll never see the burrito discounted. Free, sure, but never discounted.

  10. Nicole Price Reply

    I love discounts. What discounts mean to me is this: the rich people get to buy all the stuff at full price as soon as it reaches the shops all nice and new. Pay premium for the advantage. It you are prepared to wait a bit, get rewarded by a discount.

  11. jacob morgan Reply

    personally i think discounts are a great idea and no i don’t think it means you price your product too high. take for example clients that work with marketing, pr or seo firms. they charge them 5-15k a month on a retainer basis and if the clients signs up for a few things they usually get a discount, not because the price is too high but because they want to offer an incentive. regardless of the reason, we all know that discounting things works be all buy items from places like ross, wallmart, marshalls, walgreens, target, etc. everyone wants a deal

    of course this depends on how much you try to discount your product if you drop your price by 75% then you’re probably in trouble.

    jacob

  12. eric Reply

    on jp’s comment about discounts implies overpriced goods… i guess it depends on who’s looking at those goods. everything has a market value, but who’s defining the “market value”? i’d like to think nothing is ever overpriced, but it’s just not true. and in a way, all the guys who sell things for too high ruin it for others who want to sell at reasonable price, because now they have to create a buffer for bargaining or discounts every now and then.

    personally i dislike the discount game. makes me feel like i’m buying shit from a used car salesman. but looking strictly from a business stand point, a good sales person wouldnt only discount when necessary, he/she’d also mark up the product more when opportunities present itself. and it’s all up in JP’s head to know whether or not you really have more money to spend. =)

  13. Steve Reply

    That is a tough call. I think it also comes down to relationship. If some one has a good relationship with the company and trust them they are willing to pay higher prices. Look at Apple. There hardly drop their prices (I know except for the recent iphone). There computers stay at a higher price, and their reputation and branding are able for them to keep the price higher than most of their competitors.

    @Toilet I would have to disagree with the Norstrom idea. I think Norstrom Rack is a great store because it has discounted deals. You can get quality discounted from the overpriced retail price. I usually go there to get shoes.

  14. Goran Web Reply

    If you set a price that is because thats what you say that your worth is worth. As soon as you discount the price then you are saying well I am worth less then what it is that I charge.

    Invariably when we give discounts those clients become the hardest to deal with and want the most for nothing.

    However all this said and done there does come a time when we all give a deal but be wary.

  15. Nina Reply

    Very true what JP said. I’ve found discounts do give your customers, even the loyal ones, the impression that they have been paying too much in the past and now they should get as much as of a discount as possible. When a repeat customer comes back and asks for a 3-day discount you offered a month ago and wants it extended and says “I’ll purchase ‘if” I can get a discount…”, you know the discount itself has had an affect on how they see your service and products. Of course, do not say yes to such requests that sound more like a threat or a warning! But I’ve found the less discounts you offer, the better. Loyal customers will come back for the product and services you offer and no reason to give discounts to new customers. Especially, if you are offering quality and service.

  16. Closets Reply

    Wow, this is old.
    I’m an Appsumo fan, and as I searched for “how to give discount” I found this.
    Funny to see how Noah’s view of discounts has evolved into a whole business model…
    anyway

    I was just asked for a discount if they bought 2 of my products.
    I prefer to throw in an extra low cost bonus for free instead…
    What’s the right thing to do?