The idea of discounts has always been a hotly debated topic. Some believe that offering discounts is a good customer onboarding tactic while others believe that it cheapens a company's brand and eats into their revenue.
In a way, both viewpoints are right. But when a company's financial health and revenue growth are at stake, it's not enough to concede that discounts can go either way. Business owners need to know, without a shadow of a doubt, that they should either take advantage of or do away with discounts.
To help, we at Xcelerate Financial compiled a list of the pros and cons of offering discounts, as well as other incentive options that might work better. By the end, you should know whether or not to offer your customers financial incentives.
RULE OF THUMB REGARDING FINANCIAL DISCOUNTS
In general, people agree that it's typically a good idea to offer discounts on physical products or on SaaS subscriptions. However, the same people agree that it's typically a bad idea to discount a service offering.
The idea here is that service providers deliver their value in terms of expertise and past experiences and typically charge based on hours or something similar. If you run a company that falls under this category, it's probably best not to cheapen your expertise and background experience. In fact, charging a higher price can actually add to a customer's confidence level in you.
Physical products (including SaaS products), on the other hand, are one-time investments made by a consumer. Unlike a service, a product typically isn't recurring in nature. Since most companies with products look for volume sales, it's more common to see these companies offer discounts and succeed as a business.
THE BENEFITS OF OFFERING FINANCIAL DISCOUNTS
The first benefit of offering a discount is that you can increase your customer acquisition efforts. For example, customers who might not buy your product or service at its normal price point and leave your funnel might buy the same product or service if it was 10% - 20% less.
This will increase the size of your customer acquisition funnel and increase top line revenue. However, while your funnel might increase, your breakeven for customer acquisition will decrease due to the lower price point. Further, this might result in customers who aren't loyal and who will leave as soon as the discount ends.
The other benefit is that discounts create a sense of urgency around your product or service. Like the benefit above, this entices consumers who are on the fence to pull out their credit cards and make a purchase. Companies like TeeSpring have maximized this factor by putting running clocks on all of their shirt sales, even though the clock usually resets as soon as it hits zero.
THE BENEFITS OF NOT OFFERING A FINANCIAL DISCOUNT
Of course, there are also benefits of deciding not to offer a discount. For example, a natural downside of discounts is that they eat into your margins. If you rely on recurring revenue, discounts could harm you more than help. If you decide not to offer a discount you protect your margins and possibly the financial solvency of your business.
Further, like we mentioned above, discounts can cheapen the perceived value of your company or offering. If a consumer sees your product or service at a lower price, there's a chance they won't purchase it once the price goes back up. Deciding not to offer discounts sets a higher expectation regarding your company.
Finally, if you're going to offer a discount to someone, it's always best to offer it to everyone. Otherwise, you might create a feeling of distrust among new and existing customers. This alone is a good reason to not offer a discount. Imagine how much your margins would suffer if you had to discount all your customers. Now imagine what would happen if your existing customers left because you didn't.
Overall, discounts may or may not benefit your company. As a rule of thumb, if you're a service business you might not want to offer a discount. If you have a product, however, it might be a good idea to offer a financial discount.