Friday, March 1, 2013

More on selective discount strategies

I just wrote a post about Groupon that quoted from Martin W. Smith. Here's part of what Smith said, including some material that I didn't quote in the initial post:

Most small businesses, those who have been in business for any amount of time, know that price is tricky.

Value perceived is value created.

What happens to those hard-won “value propositions” when you are at a party and someone tells you they just ate at your favorite restaurant on a Wednesday night, ordered your favorite dish and got the same meal you buy on Saturday 50% off?

Word-of-mouth advertising, normally the best recommendation engine always, just worked AGAINST the restaurant foolish enough to believe customers gained with such steep discounts can ever be profitable. They won’t and can’t.

While Smith is specifically talking about steep discounts - the kind practiced by Groupon - after I wrote the previous post, I began musing about selective discounts in general.

In some cases selective discounts to one group of customers are strictly prohibited. When you deal with governments, you often find that a governmental entity inserts a contractual provision stating that the price you quote to the entity must be as low - or lower - than the price that you quote to any other governmental entity. Thus, your price to one customer could affect your price to all of your customers. "If I provide a discount to the city of Enumclaw, Washington, then how does that affect my business with the Department of Defense?"

But when are discounts to one set of customers (and not to another set of customers) a good thing? Maria Malidaki has looked at this, in the second of five items about discounting.

To avoid this from happening, don’t apply a general discount, especially not to new customers; 10% off for the first project and a standard discount on the second or third project could spoil them from the start.

I'd be willing to bet that Malidaki is not a Groupon fan. First, the Groupon discounts go to new customers, not to loyal customers. Second, when Malidaki considers a 10% discount excessive, it's safe to say that she's not a fan of a 50% discount. As other sources have noted, these types of customers are not good for your business in the long term.

At the same time, Malidaki is not a fan of general discounts for everyone; if you discount, give the discount to a few select customers.

[C]onsider giving discounts only to a few select customers who comply with mutually set standards. These standards could include:

payment punctuality
quality of collaboration (good communication, timely submission of materials, openness to ideas, professionalism, etc.),
the number of projects you have completed for them
the number of good clients they have referred to you

Now some of these don't necessarily apply to all businesses - for example, I do not "collaborate" with My Delight Cupcakery. But loyalty applies to nearly all businesses, even funeral homes - which is why so many businesses have loyalty programs.

Be sure to read all five of Malidaki's tips about discounting.

Oh, and as long as I'm bandying about anecdotal stories, I'll throw in one of my own.

Workplaces often have coupons from local businesses, primarily restaurants, with incentives to try the business out. One such restaurant posted an incentive at my workplace, so I went there for breakfast one morning. However, the restaurant's regular prices were relatively high for me, so I haven't been back since. Which is a good thing for the restaurant - there were a huge pile of coupons at work, with no limitations on use; if I wanted to, I could have gone back to that restaurant every morning with a new coupon, then quit when the coupons ran out or the company chased me away. Obviously, this is not the type of customer that the restaurant would want.
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