Discount pricing: how to increase profits with discounts

Discounting is a tried and tested tactic used by companies worldwide to drive sales; research has revealed discounting is the top pricing strategy for retailers across all sectors.

While discounting your product can increase your customer base and generate additional income, it can sometimes prove counterproductive.

Although reduced pricing can attract more customers, this strategy can also reduce your profit margins or attract negative personas when it isn’t planned and executed properly. Read on to find out how to discount product prices in the right way.

10 discount pricing examples

Buy one, get one free

Buy one, get one free, or BOGOF, is commonly used to attract customers to try new products. The retailer takes a loss on the second item in hopes the customer will come back to pay full price in the future. This is often seen for new product launches or seasonal items.

Percentage discounts

Percentage discounts allow for flexibility in the size of the discount. For example, a fixed percentage like 25% off seems more attractive than a random dollar discount. Whether targeted for specific items or applied storewide, these discounts add a touch of sophistication to your shopping experience.

Dollar amount discounts

Dollar amount discounts, on the other hand, work well when the regular prices don't vary much and are easy for customers to calculate their savings compared to percentages.

Whether it's a straightforward $5 off or a "spend $100, get $25 off" deal, these discounts are designed to enhance your shopping satisfaction. Calculating your savings then becomes a breeze, and it subtly encourages larger order sizes.

Bulk discounts

Encouraging you to buy more, these tiered discounts, such as 10% off for 5-9 items or 15% off for 10-14 items, not only benefit you but also help retailers achieve their sales targets. Bulk discounts are a strategic approach for both parties involved and are often used by warehouse clubs like Costco.

Loyalty discounts

Loyalty discounts act as a reward for repeat customers and help to build - you guessed it - brand loyalty. Whether through a points system or an automatic discount upon reaching a lifetime spending threshold, these rewards give you more of a compelling reason to stick with a particular retailer over a competitor.

First-time customer discount

First-time customer discounts give a strong incentive for new customers to try a product or service for the first time. It encourages new customers to take that initial leap, whether it's their first online order or booking an appointment. This is a super effective strategy for retailers to expand their customer base.

Bundle pricing

Offering savings on a carefully curated set of products, bundle pricing allows retailers to showcase a diverse range of inventory. As a super simple example, you could consider bundling items like a printer, paper, and ink cartridges for a convenient, seamless, and economical shopping experience.

Daily deals

You can infuse a sense of urgency into your shopping routine with daily deals. Designed to create a sense of scarcity, these rotating offers entice you to check in regularly for diverse discounts. It’s a win-win situation for both clearing excess inventory and ensuring customers enjoy a dynamic shopping experience.

Flash sales

Flash sales are dramatic savings for very short periods, sometimes just hours. This helps to drive excitement and impulse buying of discounted items. Having small inventory and time limitations pressures customers to buy quickly as it instills that sense of FOMO (fear of missing out).

Student discounts

Student discounts provide an accessible price point for those navigating a budget-conscious lifestyle. Serving as a long-term investment, retailers offer these discounts to build loyalty early on, recognizing the potential for extended customer relationships. Customers can simply verify eligibility with a student ID and unlock exclusive savings.

What to consider when discounting a product

Before applying any discount to your pricing strategy, be sure to plan meticulously and consider the following:

Define your objectives

Never apply a discount without establishing why you’ve decided to apply a discount in the first place.

Perhaps you’re hoping the tactic will attract new customers? Maybe you want to appease your existing customers? Are you dropping prices to reactivate churned customers?

It’s critical to identify your reason for applying a discount because there are different types of discounts applicable for different objectives.For example, if you’re trying to reach churned customers, a personal campaign is the best way to achieve your aims and win them back around.

Segment your personas and offers

When you’re discounting products, you can increase your conversion rate by introducing segmented offers based on your customers’ preferences.Create customer profiles detailing their buying habits based on previous purchases and use this information to offer discounts that are relevant to each customer.

In theory, this may seem like a daunting task. However, a customer management system (CMS) will equip you with all the information you need to see what every single customer is buying and how much money they spend, allowing you to offer an appropriate discount.

Get your timing right

When you’re considering applying a price discount, time is of the essence.If you send out a deal at a time when your customer doesn’t need it, this will have a significant impact on your conversion rate.

Be sure to use the data at your disposal to identify when sales are at their peak.If your sales trends indicate your customer base is converting at the start of the month, it wouldn’t make sense to introduce a discount at the end of the month when they’ve spent their monthly paycheck.Seasonal factors can have a substantial impact on when a company can successfully introduce price discounts.

For example, every year, the English Premier League soccer season runs from August to May, and clubs release new soccer jerseys in the build-up to the first week of the campaign. With the latest designs being released in June/July, the soon-to-be outdated jerseys are reduced by more than 50% as fans start to switch their attention to the updated designs.

Consider your margins

You need to make sure you don’t compromise too much by applying a discount that’ll mean you lose money. It’s important to set an acceptable margin range for your products and any discounts applied.

Conditional promotions are a great way to offer discounts whilst protecting your margins. These promotions differ from blanket promotions in that they entice customers with a discount on the condition that they fulfill certain criteria. For example, spend X and get X% off.

Alternatively, a condition could be to limit an offer exclusively to VIP members, or customers who’ve signed up for a loyalty scheme.

Identify upselling and cross-selling opportunities

When you discount a product, it can increase the number of visits to your website. Take advantage of this opportunity by upselling or cross-selling to generate as much income as possible from each prospective customer.eCommerce giant, Amazon, uses these techniques all the time.

For example, let’s say you want to buy the Joker DVD - you head to Amazon, search for the product, and go to add it to your basket.Before you know it, you've been presented with a suggested bundle and a $6 bargain has turned into a $24 purchase. You’ve splurged $18 more than you’d initially anticipated - just because Amazon has told you it’s an ideal combo - impulse buying at its finest.

For a full overview of the product bundling pricing strategy, visit our complete guide here.

Prioritize your new products

It’s important for your pricing discounts not to work to the detriment of your new products.As a preventative measure, list the items that have been discounted after your new products. This will ensure customers' eyes remain fixed on your brand-new, full-price products before they reach your reduced items.

How much discount should be given to the customer?

Determining the appropriate discount for your customers can depend on various factors and considerations. Here are some common approaches and factors to consider when deciding on the discount:

Cost-based pricing

Understanding the costs associated with producing or acquiring a product or service is fundamental. This approach involves factoring in not only the direct costs but also indirect costs such as overhead, marketing, and distribution expenses. By setting a price that covers these costs and allows for a reasonable profit margin, businesses can ensure financial sustainability.

Competitive pricing

Analyzing the pricing strategies of competitors is crucial for positioning your offering in the market. By offering discounts that align with or surpass competitor pricing, businesses can attract customers and remain competitive. Striking a balance between competitive pricing and maintaining profitability is key.

Market research

Conducting thorough market research helps businesses understand customer expectations and willingness to pay. This insight allows for adjustments in discounting strategies based on perceived value and market demand. Adapting discounts to align with consumer preferences can contribute to increased sales and market share.

Customer segmentation

Segmenting customers based on behavior, loyalty, or purchase volume enables businesses to offer personalized discounts. Recognizing and rewarding loyal customers with exclusive discounts can foster stronger relationships and enhance customer retention.

Promotional discounts

Implementing time-limited promotional discounts can create a sense of urgency and drive sales during specific periods. Aligning discounts with holidays, seasons, or special events capitalizes on consumer behavior and boosts overall promotional effectiveness.

Volume discounts

Providing discounts based on the quantity of products or services purchased encourages customers to place larger orders. Tiered discount structures can incentivize bulk purchases, contributing to increased revenue while still providing value to customers.

Customer Relationship Management (CRM)

Leveraging data from CRM systems allows businesses to identify and categorize customers based on their purchasing history and behavior. Offering exclusive discounts or rewards to loyal customers demonstrates appreciation and reinforces positive customer relationships.

Dynamic pricing

Implementing dynamic pricing involves adjusting prices and discounts in real-time based on market conditions, demand fluctuations, and other variables. This agile approach ensures that businesses can optimize revenue by responding to dynamic market dynamics effectively.

Profitability analysis

Regularly evaluating the impact of discounts on overall profitability is crucial. Businesses should ensure that their discounting strategies contribute positively to the bottom line, striking a balance between attracting customers and maintaining financial sustainability.

Negotiation

In B2B scenarios, being open to negotiation is essential. Understanding the specific needs and circumstances of each customer allows for tailored discounting structures, fostering mutually beneficial relationships.

Customer satisfaction

Assessing the impact of discounts on customer satisfaction is integral to maintaining a positive brand image. Striking the right balance between offering value through discounts and ensuring quality customer experiences contributes to long-term customer loyalty and positive word-of-mouth marketing.

How to increase your product price

There are also instances when you may need to increase your prices, and this can prove a challenge in itself.

Phill Agnew, Senior Product Marketing Manager at Hotjar outlined two tactics you can use:

The first tactic I want to focus on which will help you increase your price without losing customers is something called hyperbolic discounting.

Hyperbolic discounting

It's a fancy word for something we all know. It's the feeling that when you have a mountain of work piling up, and you know you need to get it done within the next couple of days but you just can't find the motivation to do it.

You put it off and instead watch Netflix and convince yourself that tomorrow you'll get all that work done. In that scenario, you have fallen victim to something called hyperbolic discounting.

“Hyperbolic discounting refers to the tendency for people to increasingly choose smaller, immediate rewards over larger later rewards”.

The problem here? Instant gratification.

Let's pretend you're selling a high-value Mercedes Benz, you could show the full cost for $40,000 today, or you could show the cost broken down perhaps by using a bit of this hyperbolic discounting insight.

You could say it's broken down to $32 per week, or $4.75 a day over the course of two years, but which would look most attractive to the user?

One study actually analyzed this to reveal conclusively which was seen as the most attractive price. The researchers presented one of three numbers at random to over 500 participants and the results revealed the shorter the time frame, the smaller the cost, the more appealing the deal.

In fact, when the prices were shown as daily figures, they were five times more likely to be rated as a great deal than when they were shown annually.For SaaS marketers and for product marketers, this is a really interesting insight.

Where possible in the future, we should pursue the extra bill, the cost of payment off into the future, we shouldn't encourage consumers to spend 40 grand now - instead, we should get them to make smaller commitments, like $4 a day.

Now that's one way you can reframe your products to push for a higher price. It works because you have to remove that immediate pain of payment. But it's not the only way you can reframe your price.

The decoy effect

I'll finish by highlighting one of the tactics that a lot of SaaS marketers use, but not one that the majority of us particularly understand - the decoy effect.Let me explain the decoy effect by bringing in the famous study which was cited by Dan Ariely in his book, Predictably Irrational.

So Dan, being a professor at Princeton University, spotted the decoy effect, not in the cinema, but while flicking through The Economist.

He found that The Economist had these three pricing options that they were publishing. They had that online-only subscription at the top ($59), the print-only subscription ($125), and then the print and web subscription for $125.

That's quite weird, right? With this third option, you get both the print and online versions, but it's the same price as the print option by itself.

Why would anyone buy the print-only option? After all, it's the same price as the print and web option.

Essentially, Dan predicted that The Economist was using this strange pricing strategy to create a decoy and encourage more consumers to spend $125, rather than the $59 for the online-only subscription.

To test this hypothesis, Dan tested it out on his students. He showed one set of his students the actual pricing with the decoy included, and the other set of students an edited version with the decoy - the print-only option - removed.

He wanted to see if removing the decoy price changed what people thought about the product and changed what people wanted to buy. Turns out removing that decoy had a huge effect.

When students were shown the decoy effect option, which was the one that The Economist had on their site, they would, on average pick the most expensive print and web subscription, it looks like such a good deal, because it was the same price as the print subscription and yet it had the web subscription included as well.

Yet, when Dan showed his students the edited version, without the print subscription included, suddenly students were far more likely to pick the online subscription only. The majority of students only spent $59.That's really interesting. Just the way that The Economist has priced their products, the way they frame their pricing, the way they built their options, dramatically changes what consumers want.

Whether you’re putting a strategy in place, discounting a product, or increasing costs, pricing plays a prevalent role in the role of any product marketer - it’s critical to understand the ins and outs of the area.

Product Marketing Core, PMA’s official certification course, includes a module focusing on the fundamentals of pricing.

It most certainly does - thanks, Phill! Enroll now and get certified at your own pace. 👇