Discounting is a minefield. Just ask JC Penney.
In 2011, JC Penney learned a hard lesson about the dangers of discounting. JC Penney had always been a discount store – and a successful one at that. You wouldn’t shop there for gold watches encrusted with blood diamonds or limited-edition hats made of penguin feathers. People shopped at JC Penney for one and one reason only – discounts. If JC Penney wanted to sell a suit, they’d price it at $150 for six weeks, and then offer it for sale at $75. Of course, their customers loved it. And all was well, until one day, JC Penney wondered, “Why have a suit hanging on a mannequin for six weeks, if it can be sold at $80, or even $90, flat price, from Day One?”
If JC Penney was expecting a stampede to their stores, they were wrong. Loyal customers ditched JC Penney like rats off a sinking ship. JC Penney learned an important lesson that year: people do not simply want to save money – they want the thrill of a steal. By taking away this thrill, JC Penney had entered into a price war with brands like “every day low” Walmart. And lost.
The JC Penney tragedy is not an endorsement of steep discounting. In fact, it teaches us that your customers are motivated by positive experiences, even if they claim that low prices are what makes them choose you.
How NOT to use discounting
Ask any of your customers if they want discount coupons, and invariably, they’ll say, “GIMMIE GIMMIE GIMMIE”. But using coupons to increase sales can be the business equivalent of swatting a fly sitting on your face with a sledgehammer. Here’s why:
Coupons can make you bleed money
Let’s say that you are using a popular, prepaid coupon service, such as Groupon or LivingSocial. Typically, these services keep 50% over the discount that you offer to your customers. That means that if you’re distributing coupons for 50% off, you’re losing 75% of your gross revenue on each sale! That’s a lot of money! It’s $75 on every $100 in sales, which is way more than your total marketing budget. And to retain the same level of profitability, you’ll need to quadruple your sales! And that might be impossible in the computer repair business.
Promotional offers can alienate your loyal clientele
In the Age of Social Media, reputations can be built and destroyed, permanently, in a matter of days, or even hours. Let’s say that John Doe Realty has been your client for years. Whenever they have a problem with their computers, networks, or need software updates, they come to you. They love your service, and you’re on first-name terms with their staff. But John Doe has a new competitor, John Blow Realty. You really want their business too, so let’s say that you offer them a six-month contract for 20% off. What will the good people at John Doe have to say about that? Will they call you up and say, “Heyyy, buddy! We understand that you want to grow your business and are working on rock-bottom rates for John Blow. Let us know if you need a referral. And how about a beer this Sunday?”
No. Your loyal clients are going to think that you’ve been ripping them off all these years. And they’ll ask for a 25% discount, for old times sake. Good luck handling that.
You might get too many customers. Uh-oh.
If your promotional offer is wildly successful, your business might face a different kind of crisis: too many customers. But wait – isn’t that a good thing? Well, not if you lose money on each discount and are reduced to sweatshop labor rates.
Even if your promotional blitz does win you a lot of new customers, that’s no guarantee that they’ll be loyal to you. Think from their perspective for a second. The first time you did a repair at half price, that became their anchor rate – the rate that all your subsequent work will be judged against. Your new customers won’t feel lucky to have gotten 50% off the first time. They’ll think that you’ve doubled a fair rate – so why should they be loyal to you? They’ll use another coupon and try another service. And you took that financial hit for nothing.
The thing about coupons and offers is that they can be addictive. Once customers are hooked to them, you’ll never get their business unless you keep discounting. And if you’re craving a sick, sinking feeling in the pit of your stomach, try spending your weekends on your new clients, knowing that you’re losing money on every one of them.
How you should offer discounts
Remember that sledgehammer analogy? Like sledgehammers, coupons can be useful too – they just aren’t a one-size-fits-all solution. Here’s how you should use them:
Use coupons to reward loyal customers
Instead of carpet-bombing your town with direct mail coupons (and alienating your existing customers), use coupons to reward only your most loyal ones. Unlike shopping at JC Penney, people don’t repair computers to kill boredom. Your business thrives thanks to customers who trust you, over anyone else, to fix their problems. So reward that trust with a surprise discount. In fact, why not include a personalized letter with those coupons? Warm, thoughtful gestures will do more for your business than any cold, mathematical strategy ever could.
Want to reach out to new customers? When you mail discount coupons to a loyal client, include more coupons of a different color – meant to be given to someone else. If your client is a person, they could pass them on to a friend. A client business could distribute them to a partner, or even to their customers. Look at all the problems that this simple technique solves for you. First, you won’t be groping in the dark anymore. You’ll be likely to get better customers – the ‘nice’ kind that their friends want to give free coupons to. You’ll be strengthening your reputation in your community, when unsolicited mail can erode it. And you’ll be getting more bang for your marketing buck.
Offer discounts on add-on services
Another way to use coupons without destroying your profits is to discount services that cost practically nothing (except for time). For example, replacing a power jack will cost you money (the cost of the power jack) but installing freeware will cost you nothing. Such free or low-cost services can be made part of a standard service package, and then discounted. Irrespective of what problem a customer has, you can provide this service package at a heavily discounted rate. It’s a win-win: your customer will get better value than they anticipated, and you’ll be getting satisfied customers who will keep coming back to you, without losing money for it.
Offer discounts for a limited period only
This is more of a rule of thumb that should be applied to any strategy you choose. By offering a discount, you create an impulsive desire to purchase your services. By placing a time limit on the offer, you tempt your customers to act on that impulse.
Let your customers earn their discounts
Everyone loves freebies. But that doesn’t mean that they respect or cherish them. Make your offers memorable by letting your customers earn them. Let “fun” be your business identity. What if your flyers had puzzles on them – crosswords, number games, riddles – and not the easy ones that you can solve by a Google search? And what if you offer attractive, limited-period discounts to those who can solve these puzzles and hand them in? Think about it.
Let’s do a bit of role-play here. Imagine that you’re checking your mailbox, and find a flyer for Acme Computer Services with a word puzzle and a geometric puzzle on it. Now ordinarily, you’d toss it straight into trash, but now you’re thinking, “Wait, let me solve these, and then toss it away.” Maybe your children are helping you with it. After racking your brains for a while – investing yourself in them – you solve both. The word puzzle gives you a 10% discount, and the geometric puzzle gives you another 10% off. And even though you never cared about that weird noise that your computer made, you will be tempted to have it checked. One thing’s for certain – you won’t be forgetting about Acme Computer Services for a while!
By giving your customers something to play with, you avoid coming across as a newbie or failing business that can’t get enough clients. You’re connecting in a meaningful way with potential customers, shaping their perception of what your identity is and what your business is about. And you’ll be accomplishing something that is nearly impossible – giving a discount without eroding your brand’s value.
Leverage social media
We are living in the Age of Social Media. Word of mouth can build or destroy your reputation. Even large, established companies struggle to involve people on social media – to say that you have an uphill struggle ahead of you would be understating it. But you can make the battle easier by offering special discounts to the most enthusiastic of your social media supporters. If someone shares your posts, writes meaningful comments or supports a cause that you care about, thank them and offer a coupon as a reward – publicly. Let it be understood on social media that you are responsive to your customers and value the time and effort they put into connecting with you online.
Let your employees dish out the goodies
Here’s another idea: when you’re done planning and printing your coupons, give some to your employees, to be distributed at their discretion. Why? For one, it saves you some of the expense of distributing coupons. Your employees are also likely to offer them to ‘good’ customers – the ones who do not complain, haggle too much, or expect the moon. Can your employees be biased? Of course. But they will also be more involved in your business. This simple step can transform them into partners who take the initiative and help your business grow, whatever their intent might be. And small acts of kindness go a long way.
Have you used, or thought of giving discounts and coupons? What has your experience been like? We’d love to hear from you – share your thoughts in the comments!