Managing Price Discounting

A leading website defines Discounts as “Percentage reduction in the gross price given by a seller to a buyer who pays within a set period of time. Cash discounts are given to shorten the length of time the seller must wait to collect the amount due. Cash discounts are offered to buyers in most industries, including media buyers.

A common business phrase for a cash discount is “2/10, net/30,” meaning that a 2% discount is offered if the amount due is paid within 10 days; otherwise 100% of the amount due is payable in 30 days. For example, if the amount due is $100, the buyer may pay $98 within 10 days or $100 within 30 days.”

Discounting is becoming a popular mean to attract the customers. Simon Hathaway, managing director of retail specialist Saatchi & Saatchi X, says discounting has become part of the business model for many retailers, especially those in the furnishing sector. He believes that much of this is driven by retailers taking advantage of consumers’ ignorance of the price of many products. ‘If you asked 20 people the price of a pint of milk, you would get 20 different answers,’ he says.

Mike Watkins, senior manager of retail services at A.C. Nielsen, says the potential rewards of tempting shoppers with discounting are huge. ‘Consumers are hooked on promotions,’ he says. ‘On average, about 80% of UK shoppers are looking for price promotions — that’s the highest in Europe. Low prices are now expected.’ Merchants often advertise various types of price discounts in attempts to affect favorably the price-related evaluations and shopping intentions of consumers.

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Why does price discounting occur – why is it so prevalent?

Kevin Cancy, chairman of Copernicus, a major marketing research and consulting firm found that only 5 to 35 percent of the customers are price sensitive. People with higher income and higher product involvement are ready to pay the price for features, customer service, quality , added convenience and the brand name. Most companies will adjust their list price and give discounts and allowance for early payment, volume purchases and off-season buying.

It is well-accepted fact that short-term promotion leads to an increase in the sales. Although the size of the discount determines absolute or relative prices, an important additional type of consumer behavior relating to the processing of information concerning the size of the discount, per se, may have to be addressed before predictions concerning the impact of size of discount can be made. Besides this there are many other objectives that a firm seeks to achieve with discounts. Some of them are:

Keeping up with competition: a sale or a discount offer is likely to be perceived and accepted as a good value when the advertiser is perceived as price competitive (Fry and McDougall, 1974; Biswas and Blair, 1991).
Occupying more shelf space in the retail showrooms: Keeping good relations with the dealer often causes discounts. This is more evident in the cases when the dealer is strong. Either he has strong brand value in the region or is a bulk buyer of the product.

  • To promote a new innovation
  • To clear the decks for new stocks ( change of season/fashion)
  • Price promotions showing tangible increase in Sales
  • Attracting new customers to the brand which may result in increased brand switching.

Also, Research has indicated that a sale or a discount offer is likely to be perceived and accepted as a good value when the advertiser is perceived as price competitive. One reason for such effects relating to store price image may be the nature of attributions for the price discount made by the consumers. For example, for a low-price image store, consumers may be more likely to make merchant-related attributions that indicate “meeting competitors’ prices” or “passing on savings from bulk purchases from manufacturers” than for a high-price image store.

Differences may also be observed in product-related attributions between the stores. Because many consumers believe there is a positive relationship between price and product quality (Rao and Monroe, 1989; Lichtenstein and Burton, 1989), a price discount on merchandise at a store that has a low-price image may sometimes be perceived as related to something negative about the products (such as out-of-date models or inferior quality).

The key reason often sighted by marketers is that it is done to is done to invite new users to try the product. If these people appreciate the product they may switch to your brand. Does it work well to achieve the objectives that are typically set for it?

Though the prices discounts do spike up the demands temporarily it is very rare cases that it actually spikes the demand in the long run. But there is a negative side to it, like:

  • Long run price promotions make consumers more sensitive in both loyal and non-loyal segments. They also train non-loyal segments to seek price discounts, thereby making them more sensitive to price promotion (Mela, Gupta and Lehmann, 1997).
  • Discounting can be a useful tool if the company can gain some concessions in return, like an extended contract of bulk order.
  • Short run price discounts also cause the loyal customers towards bulk buying. This means increase in customer inventories and thus may result in the reduction of subsequent buying.
  • Research suggests that the price promotion more often then not is unsuccessful in brand switching. The reasons for that are very evident, perhaps one of them can be the price perception of the customer is set to the discounted price of the product.
  • For a brand positioned as an aspiration brand the discounts can be suicidal. This may lead more people to buy the brand but it may result in the loss of loyal customers who constitute the major chunk of buyers in the normal course.

The price discounts works well in a few cases like:

  • Discounts offered in the time of need
  • Discounts towards the end of season achieve their objective of clearing the decks for the new stocks

Are there some objectives it is well suited for and others it is not suited for?

There is lots of confusion on the impact of price discounts, Mela, Gupta and Lehmann in their paper “The long term effects of Promotion and Advertising on consumer brand choice” state that companies like Colgate Palmolive Ralston, P&G have curtailed the price based promotions but there are some like Heinz who continue to adhere to it.

In a research M. P. MARTI´ NEZ-RUIZ, A. MOLLA´ -DESCALS, M. A. GO´ MEZ-BORJA & J. L. ROJO-A´ LVAREZ (May 2006)  found that for The high-priced brands of the storable category that promotional discounts had a bigger impact during the first days of the promotional period, whereas no special pattern was detected in the low-priced brands of this category.

There are some places where the discounts are very well suited for like:

  • Discounts to people visiting in lean season at resorts. This brings extends the brand to people who otherwise may not use it.
  • In an attempt to divert competition attention from the innovations. A price discount leads competition to fight the discount and in the mean time you can position your new innovation.

Though there is no research evidence to justify these observations

How can a product manager or a brand manager plan a discounting strategy that does not harm brand value?
Some guidelines can be suggested for the retailer to set adequate promotional discounts periods.

Objective of Discounts: The Product manager should very clearly announce the objective of the discounts. Generally discounts offered for pumping the sagging sales should be avoided. A clear motive and the time frame to achieve that motive should be clear.

Timing of the Discount: Timing of the discounts is very important. A end of season sale may not have that bad an impact on the brand as a sale in the peak season. A grocery store offering a discount in the year of drought is bound to have more loyal customer’s that any other store around the neighborhood.

Limit the Duration: In the first place, promotional periods for the high-priced brands of the storable category should not exceed 10 days; otherwise the promotion profitability could be reduced. In addition to this, discount levels should not exceed a certain magnitude, which depends on the considered brand.

Add Value Added Services: An even better strategy than discounting your price is to add value to your goods or services – such as free installation, maintenance training, and longer product warranties. For example, “I can’t lower my price but I am going to give you consulting which will save you the same amount of money, had you received the lower price.” As Mr. Kotler explained, there are some companies that are extremely knowledgeable about their customer’s business, and able to point out to their customer ways in which they can save money. Baxter, a hospital supplies company, provides a good example of adding value.

“They give credit points to hospitals who buy their products – just like airlines do.” These points can be redeemed for a cash rebate or for consulting days. Baxter has 12 key consulting teams, each with a different focus. One team, for example, will help the hospital improve its information management system while another team will help it better manage its wastes, elaborated Mr. Kotler. As it turns out, the consulting is so useful that the points are better used for consulting days.

Avoid Frequent Discounts: Frequent discounts might influence the consumers’ reference price points and so produce a wear out effect.

Evaluate other options like bundling instead of price discounts: Bundling leads to repackaging the products along with other products. Even in this case the frequency and duration should be kept in mind.

Cited References

M. P. MARTI´ NEZ-RUIZ, A. MOLLA´ -DESCALS, M. A. GO´ MEZ-BORJA & J. L. ROJO-A´ LVAREZ (May 2006) ‘Assessing the Impact of Temporary Retail Price Discounts Intervals Using SVM Semi-parametric Regression’ Int. Rev. of Retail, Distribution and Consumer Research Vol. 16, No. 2, 181 – 197

DONALD R. LICHTENSTEIN, ABHIJIT BISWAS, KATHERINE FRACCASTORO  (1994) ‘The Role of Attributions in Consumer Perceptions of Retail Advertisements Promoting Price Discounts’ Marketing Letters 5:2, (1994): 131-140, Kluwer Academic Publishers
Carf Mela, Gupta Sunil, Lehmann Donald  (May 1997) ‘The long Term Impact of Promotion and Advertising on Consumer Brand Choice.’ Journal of Marketing Research 34 (May) p248-261
Quilter, James (March 2007) Marketing, p20-20,
Kotler Philip (2003), Marketing Management Pearson Education p-489-490

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