The goal of pricing is to align your price with the value customers place on your product. Discounts give you a way to achieve that – by aligning your price with the price a customer is prepared to pay.
The goal is a change in behavior – a customer that would not purchase at your normal prices makes a still profitable purchase at the discounted price.
Here are three situations where discounting, to change behavior and make a sale you would not get otherwise, makes perfect sense.
Most of us sell products with diminishing marginal utility, meaning that each additional unit consumed adds a little less utility than the one that came before it. In the case of flowers "utility" means pleasure.
Imagine a customer that buys one dozen roses. It would be even better if they bought two dozen – it's a bigger sale, and the bigger order will get a bigger, better reaction from the recipient and anyone watching. That means more people getting a great experience with your brand.
But it's a tough upsell unless it is priced aggressively. Most florists want to charge twice as much money because there are twice as many flowers. The problem is that research shows that to get twice the "wow" it would probably take four times the flowers. Customers won't pay twice as much money because they know they won't be getting twice as much "utility".
Movie theaters face a similar problem. As a result the medium popcorn typically contains twice as much as the small, but costs maybe 10% more. The theater knows that twice as much popcorn does not provide twice as much enjoyment, so they discount the extra popcorn aggressively. They discount to get you to buy more.
The typical North American male buys flowers a few times a year, usually on one or more of the following occasions: Valentine's Day, Mother's Day, birthday and anniversary.
On two of those days (Valentine's Day and Mother's Day) they place a very high value on your product and will pay a premium. On the birthday and anniversary they will typically pay your standard prices. You definitely don't want to discount at these times!
The rest of the year that customer places a lower value on your products, and see your prices as being out of whack. Discounting inside a window that won't cannibalize full price Valentine's Day/Mother's Day/birthday/anniversary sales at full price aligns your price with their value and increases sales.
If you have a truly superior product then discounting to customers currently paying less for a similar, but inferior, product makes sense. The goal is to gain their loyalty by exposing them to your higher quality without "risk" (meaning that they can try your better, more expensive product for something close to what they pay for a cheaper inferior product).
Discounting should be done selectively. You don't want to lose money because you discounted below your costs, and you don't want to leave money on the table by discounting to a customer that would have paid full price. But there is a time and place for discounting.
Beyond Cost Plus is sponsored by FloristWare – the most popular independent POS software for flower shops.