My love-hate relationship with discounts

Price elasticity of demand

  • Elastic — if the change in quantity is greater than the change in price
  • Unitary — if the change in a quantity equal to the change in price
  • Inelastic — if the change in quantity is less than the change in price
  1. If it’s easy for your customers to substitute your product with another (e.g. substitute products or lots of offers from competitors) when you increase your price the demand will drop. This is because customers simply buy from your competitors or buy a substitute product.
  2. The more discretionary a purchase is, the more its quantity will fall in response to price rises.
  3. The less discretionary a good is, the less its quantity demanded will fall. It means the price is inelastic i.e. customers agree to pay premium prices for brand named items, additive products (e.g. alcohol, cigarette), and required add-on products (e.g. iPhones to use iTunes).

How to do a discount right

  1. A discount shouldn’t come as a surprise. You should set a clear expectation to your customers when the discount will happen and what the threshold is.
  2. You should look after your existing customers first. You spend a lot of times and money to get them in the first place. The worst thing that could happen is they are upset and stop recommending your product.
  3. You have a good reason or a justification to offer a discount. End of year discount makes sense. Closing down sale that lasts for 6 months does not.
  4. Your discount campaign should be simple and straight forward. It’s a one number e.g. 20% OFF campaign.
  5. You should educate your customers what a discount threshold is. Apple never offers a discount of more than 10%, for example.

The rule of 100

  • If the prices are lower than $100, the percentage discounts (e.g. 10% off) will seem larger.
  • If the prices are higher than $100, the numerical discounts (e.g. $100 off) will seem larger.

The 3 mistakes to avoid when offering a discount

  1. We want to create urgency. It’s no point to do a discount if customers don’t feel they have to do something about it NOW.
  2. We expect the FOMO effect. It’s Fear Of Missing Out, which also leads to point 1 — you want your customers to do something NOW.

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Apivut Chakuthip

Apivut Chakuthip

Strategic Marketing Executive | Specialised in developing differentiation marketing strategies | Founder of www.strategyinbytes.com.