Discounting: A Dangerous Addiction

My wife and daughter no longer shop at certain stores unless there is a major sale. Their reason: it would be foolish to pay regular prices, since huge discounts are offered so frequently.

Clearly, discounting has been around a long time and the rationale is obvious. In poor economic times, it seems all the more imperative. Also, if competitors are discounting heavily, how can a marketer not offer discounts?

All that makes sense. The problem, however, occurs when discounting, like an addiction, becomes a dependency. The end result is that the only compelling reason to visit the company’s store or web site is for another discount ”high.” This addiction by the consumer is perpetuated by the seller’s addiction to discounting, and so the cycle deepens.

Based on over 100 Voice of Customer Relationship Research studies we have conducted for companies such as NBC Universal, Microsoft, IBM, Life Line Screening, and others, a consistent pattern has emerged:

• If a company or product is viewed as a commodity, price will always be cited as the #1 variable driving purchases.
• Conversely, if a company or product is viewed as a source of value, then price is consistently ranked as variable #3 or #4, after product or service quality, customer service, and other factors such as value-added information or access to a community of people with similar interest or needs. This holds true regardless of the price of the purchase, or whether it is a BtoB or BtoC purchase.

So, with discounts, discounts everywhere, what’s a poor marketer to do?

The answer...break the cycle! Do not allow your company or brand to become, or remain, a discount addict.

Yes, you have to offer discounts at times, but this cannot become the main reason customers buy from you. Build value around your company, brand and products. Create a value-added experience for customers so your store and/or site become a destination and worthy experience, not just a place for transactions.

Also consider that many people think about what they buy in terms of what it says about them as people. If discounting is the main draw, it says they are good shoppers, which has a very low switching cost relative to defecting to other brands (part of being a good shopper is being shoppertunistic). If buying from a company says you are smart, hip, responsible, etc., you can create cognitive dissonance by switching to a competitor just because they have cheaper prices, because you could be invalidating the good things you thought about yourself by having bought from the first company. The stronger your engagement with a company, the less likely you are to switch just because of price.

A case in point is Threadless. They have taken the act of selling T-shirts, which could have been a simple, commodity-driven sales experience and transformed into something very special. They are a community-driven online marketer specializing in T-shirts designed by members of the community. This community is made up of 3 groups; purchasers, designers and reviewers. According to the Sloan Management Review, the community and customer experience is so compelling that 95% of those purchasing from Threadless.com have voted and posted comments...before making a purchase.

Yes, Threadless uses discounts and has sales, but these are just an occasional element of a much broader, more compelling customer engagement strategy. And, the results of this strategy go straight to the bottom line:

• Over 1.4 million members.
• Over 1.8 million Twitter and Facebook followers.
• Approximately $30 million in annual sales.

Our advice is not to follow the flock of discount addicts. This diminishes the value of your brand and can only result in ever-shrinking margins and loss of competitive differentiation.

Instead, build value around your product or service. Make the experience of doing business with you exciting and fun. Learn from innovators like Threadless, NikeiD, and Starbucks, who have created powerful customer experiences in product categories that less innovative competitors have marketed as discount-driven commodities.