The value of discounts
Before we move forward, let's take a quick look at why companies discount their products in the first place. This list is in no way comprehensive, but here are a few key factors that drive discounting and promotional strategies.
1. Awareness and attention. In today's world of media fragmentation -- with more new products, channels and choices than ever before -- brands that introduce new products are struggling to gain consumer awareness and attention. This struggle is evident not only in the aggressive nature of "pay attention to me" discounts, but also in the sometimes-over-the-top packaging of offers. Whether it's via a corny banner ad, pushy email or poorly executed direct mail piece, many companies have gone to the extreme just to grab a customer's attention.
2. Trial. After consumers are aware of a given product and its value proposition, companies must get consumers to try the product. This can be achieved via multiple means, including through discounts on a consumer's first purchase, free shipping, buy-one-get-one-free deals, etc.
3. Cross-sell or up-sell. Once consumers try a company's product, the company will naturally want to get them to buy more of that product or something different. But not so fast. There is both art and science involved in getting consumers, especially newer ones, to try other products or to buy more expensive or higher margin products early on in their relationship with a company. Examples of strategies for doing this include offering free shipping on purchases of $100 or more, offering gift certificates when customers upgrade their products or typical buy-three-get-one-free enticements.
4. Excess or distressed inventory. Most companies have, at one point or another, found themselves with excess or distressed inventory. This may be a one-time result of poor planning or unexpected market conditions. Or it may occur in an ongoing manner in situations where the given company sells a perishable product or service. Similarly, a company may simply miss or overestimate the revenue opportunity associated with a given product. For example, a shoe store that ordered too many pairs of what it thought would be the next hot item may end up offering the shoes at a deep discount. Likewise, airlines may offer special weekend e-fares on seats or routes that have not sold out.
5. Purchase frequency. Some companies use discounting as a way to drive higher purchase frequency. This could be because the company is driven by a low margin, high frequency business model. It could also be because it has a product that lends itself to frequent usage (e.g., milk, orange juice, toothpaste or shoes). Or, in an online environment, the company might aim to drive consumers back to its website as often as possible, not just as means of generating sales, but for the additional page views that could translate into advertising revenue or additional customer data.
