Discounting is a tried and tested tactic used by companies worldwide to drive sales; research has revealed discounting is the top pricing strategy for retailers across all sectors.
While discounting your product can increase your customer base and generate additional income, it can sometimes prove counterproductive.
Although reduced pricing can attract more customers, this strategy can also reduce your profit margins or attract negative personas when it isn’t planned and executed properly. Read on to find out how to discount product price in the right way.
What to consider when discounting a product
Before applying any discount to your pricing strategy, be sure to plan meticulously and consider the following:
Define your objectives
Never apply a discount without establishing why you’ve decided to apply a discount in the first place.
Perhaps you’re hoping the tactic will attract new customers? Maybe you want to appease your existing customers? Are you dropping prices to reactivate churned customers?
It’s critical to identify your reason for applying a discount because there are different types of discounts applicable for different objectives.
For example, if you’re trying to reach churned customers, a personal campaign is the best way to achieve your aims and win them back around.
Segment your personas and offers
When you’re discounting products, you can increase your conversion rate by introducing segmented offers based on your customers’ preferences.
Create customer profiles detailing their buying habits based on previous purchases and use this information to offer discounts that are relevant to each customer.
In theory, this may seem like a daunting task. However, a customer management system (CMS) will equip you with all the information you need to see what every single customer is buying and how much money they spent, allowing you to offer an appropriate discount.
Get your timing right
When you’re considering applying a price discount, time is of the essence.
If you send out a deal at a time when your customer doesn’t need it, this will have a significant impact on your conversion rate.
Be sure to use the data at your disposal to identify when sales are at their peak.
If your sales trends indicate your customer base is converting at the start of the month, it wouldn’t make sense to introduce a discount at the end of the month when they’ve spent their monthly paycheck.
Seasonal factors can have a substantial impact on when a company can successfully introduce price discounts.
For example, every year, the English Premier League soccer season runs from August to May, and clubs release new soccer jerseys in the build-up to the first week of the campaign. With the latest designs being released in June/July, the soon-to-be outdated jerseys are reduced by more than 50% as fans start to switch their attention to the updated designs.
Consider your margins
You need to make sure you don’t compromise too much by applying a discount that’ll mean you lose money. It’s important to set an acceptable margin range for your products and any discounts applied.
Conditional promotions are a great way to offer discounts whilst protecting your margins. These promotions differ from blanket promotions in that they entice customers with a discount on the condition that they fulfil certain criteria. For example, spend X and get X% off.
Alternatively, a condition could be to limit an offer exclusively to VIP members, or customers who’ve signed up for a loyalty scheme.
Identify upselling and cross-selling opportunities
When you discount a product, it can increase the number of visits to your website. Take advantage of this opportunity by upselling or cross-selling to generate as much income as possible from each prospective customer.
eCommerce giant, Amazon, uses these techniques all the time.
For example, let’s say you want to buy the Joker DVD - you head to Amazon, search for the product and go to add it to your basket.
Before you know it, you've been presented with a suggested bundle and a $6 bargain has turned into a $24 purchase. You’ve splurged $18 more than you’d initially anticipated - just because Amazon has told you it’s an ideal combo - impulse buying at its finest.
Prioritize your new products
It’s important for your pricing discounts not to work to the detriment of your new products.
As a preventative measure, list the items that’ve been discounted after your new products. This will ensure customers eyes remain fixed on your brand-new, full-price products, before they reach your reduced items.
How to increase your product price
There are also instances when you may need to increase your prices, and this can prove a challenge in itself.
Phill Agnew, Senior Product Marketing Manager at Hotjar outlined two tactics you can use:
The first tactic I want to focus on which will help you increase your price without losing customers is something called hyperbolic discounting.
It's a fancy word for something we all know. It's the feeling that when you have a mountain of work piling up, and you know you need to get it done within the next couple of days but you just can't find the motivation to do it.
You put it off and instead watch Netflix and convince yourself that tomorrow you'll get all that work done. In that scenario, you have fallen victim to something called hyperbolic discounting.
”Hyperbolic discounting refers to the tendency for people to increasingly choose smaller, immediate rewards over larger later rewards”.
The problem here? Instant gratification.
Let's pretend you're selling a high-value Mercedes Benz, you could show the full cost for $40,000 today, or you could show the cost broken down perhaps by using a bit of this hyperbolic discounting insight.
You could say it's broken down to $32 per week, or $4.75 a day over the course of two years, but which would look most attractive to the user?
One study actually analyzed this to reveal conclusively which was seen as the most attractive price. The researchers presented one of three numbers at random to over 500 participants and the results revealed the shorter the time frame, the smaller the cost, the more appealing the deal.
In fact, when the prices were shown as daily figures, they were five times more likely to be rated as a great deal than when they were shown annually.
For SaaS marketers and for product marketers, this is a really interesting insight.
Where possible in the future, we should pursue the extra bill, the cost of payment off into the future, we shouldn't encourage consumers to spend 40 grand now - instead, we should get them to make smaller commitments, like $4 a day.
Now that's one way you can reframe your products to push for a higher price. It works because you have to remove that immediate pain of payment. But it's not the only way you can reframe your price.
The decoy effect
I'll finish by highlighting one of the tactics that a lot of SaaS marketers use, but not one that the majority of us particularly understand - the decoy effect.
Let me explain the decoy effect by bringing in the famous study which was cited by Dan Ariely in his book, Predictably Irrational.
So Dan, being a professor at Princeton University, spotted the decoy effect, not in the cinema, but while flicking through The Economist.
He found that The Economist had these three pricing options that they were publishing. They had that online-only subscription at the top ($59), the print-only subscription ($125), and then the print and web subscription for $125.
That's quite weird, right? With this third option, you get both the print and online versions, but it's the same price as the print option by itself.
Why would anyone buy the print-only option? After all, it's the same price as the print and web option.
Essentially, Dan predicted that The Economist was using this strange pricing strategy to create a decoy and encourage more consumers to spend $125, rather than the $59 for the online-only subscription.
To test this hypothesis, Dan tested it out on his students. He showed one set of his students the actual pricing with the decoy included, and the other set of students an edited version with the decoy - the print-only option - removed.
He wanted to see if removing the decoy price changed what people thought about the product and changed what people wanted to buy. Turns out removing that decoy had a huge effect.
When students were shown the decoy effect option, which was the one that The Economist had on their site, they would, on average pick the most expensive print and web subscription, it looks like such a good deal, because it was the same price as the print subscription and yet it had the web subscription included as well.
Yet, when Dan showed his students the edited version, without the print subscription included, suddenly students were far more likely to pick the online subscription only. The majority of students only spent $59.
That's really interesting. Just the way that The Economist has priced their products, the way they frame their pricing, the way they built their options, dramatically changes what consumers want.
Whether you’re putting a strategy in place, discounting a product, or increasing costs, pricing plays a prevalent role in the role of any product marketer - it’s critical to understand the ins and outs of the area.
Product Marketing Core, PMA’s official certification course, includes a module focusing on the fundamentals of pricing.
It most certainly does - thanks, Phill! Enrol now and get certified at your own pace. 👇