I am often asked if I offer discounts on services. I get asked both by potential clients and fellow entrepreneurs. So, I’d like to offer some of my thoughts on the pros and cons of offering discounts in both service and product based industries.
The Pros of Offering Discounts
Discounts are Enticing
We all love a bargain. But we also want quality. So, by offering your products or services at a reduced cost, you are enticing potential customers that might have been on the fence about purchasing. In addition, discounts are generally for a limited time, so they create a sense of urgency that may be need in order for some customer to take action.
Discounts Offer Marketing Opportunities
Discount offer you the opportunity to highlight your products or service for additional marketing exposure. Sharing your exciting new offer via advertisements, joint ventures, social media, and other avenues will help increase your visibility. Again, the ‘limited time’ factor helps increase the effectiveness of this marketing.
The Cons of Offering Discounts
Discounts Can Eat Into Your Profit Margin
If you are already offering your products or services at a price that is barely profitable, then it could be detrimental to offer discounts. It’s never smart to take a loss of what you are offering. There are obvious financial pitfalls to selling your product or service for less than you can afford, but there are also psychological pitfalls.
Discounts Can Create Feelings of Animosity
If you know that you are making less money, or even losing money on a transaction, then you are not likely to give it the attention that it deserves. You will often underperform and may even disappoint a new client. If the discount is a long-term offer, then you may even begin to resent the client because you feel that they are not paying you what you are worth.
Discounts Can Reduce Perceived Value
Offering your product or service at a lower price point can set preconceived notions about the value that you are providing. After being introduced at a lower price, there are many people that will then feel that you standard price is too high and choose not to become long term clients.
As a service provider, I do not usually find it beneficial to offer monetary discounts. Because the value of our work is found in our expertise and experience, and expressed via our time time, it’s far too important that we get paid for what we do. With that said, there is an enormous benefit to offering a monetary discount for referrals, current clients that recommend our work to friends or colleagues. I also find it appropriate to offer another type of ‘discount’, in the form of a first month termination clause for new clients. This helps reassure them that I have confidence in the work of me and my team.
And for new entrepreneurs that feel the need to not only offer discounts, but go as far as ‘free samples’, I address this in another post. Thinking of Giving Away Services to Win New Clients?
For physical products, I do feel that a different approach can be taken. With a product, you are making a one-time investment and then attempting to recoup that investment with long-terms sales. Because the ultimate goal is sales, and lots of them, you can often benefit from offering limited time discounts or special offers. This is especially true if you offer unique products, consumable products, or have a large product line. You can also use the art of ‘bundling’ to increase sales and move merchandise, without decreasing the perceived value of a single item.
What do you think? What is your experience with offering discounts? Have you tried services such as Groupon or Living Social?
Image courtesy of free digital photos