The primary motivation to offer deep discounts is to attract new customers. However, the launch of retailers like Amazon and commerce solutions like Groupon, has incentivized people to change their shopping behavior.
You might have heard a story of a business owner who offered a 50% discount on set of services. Hundreds of people purchased the deal, the majority came through the door to redeem the coupon (or groupon). The owner was confronted with an influx of business and faced scheduling and inventory issues, only to later discover that the business lost money on every sale and the expected number of return customers (if there even was an expectation, or if it was measured!) was significantly lower than projected.
How could this happen?
In part, it's due to a shift in consumer thinking that has resulted in thoughts like these:
- “Why pay $125 for a massage, when another local spa is offering something similar for $75?”
- “I got a great massage for $75 – so that's the price I'll look to pay next time, too.”
And it part it can be due to a business owner taking action without fully thinking through the decision. Deeply discounted offerings present several risks to business owners:
(1) Attracting “price hoppers”: A significant risk is when consumers view products / services as undifferentiated commodities and therefore “price hop” – following the best price, rather than developing loyalty to the specific retailer. Offering deals via sites like Groupon actually attracts an even greater percentage of price sensitive customers to your business because people on Groupon are looking for a deal. This is why the conversion rates to long term customers is frequently low.
(2) Unconsciously updating pricing expectations: Once someone gets a “great deal”, he or she will set that price as a benchmark. When the same customer pays more in the future, there is some level of dissatisfaction that continues because he or she is paying more than in the past. Think about the airline industry. Once you pay $150 for a roundtrip flight to Las Vegas, you'll always want that price, even when you're shelling out $350 or $500 because of current market rates. Or think about those stories you heard from your grandparents about milk only costing 10 cents. Nobody likes to pay more later.
(3) Offering a bad deal for the business: Many business owners fail to calculate the real cost of doing business before they create the deal. Under pressure to just “get people in the door”, it's easy to overlook hidden costs and lose money on the deal. Frequently the business owner sells the idea to his or her staff with the promise “we'll have so many more customers in the future” and asks the staff to provide a service for a lower rate, or relies on the staff to handle the complaints resulting from a shortage in inventory. Additionally, when there are new people coming through the door, it can make it more challenging to provide good service to the existing, loyal customer base.
Attracting new customers is a critical part of growing a business, and deeply discounted offers aren't going to go away anytime soon. By understanding the risks, a business owner can make a better decision about the kind of offer to give to first-time customers.
Erika Hovland, Founder of IOLITE Global Consulting, provides business advice to companies ready to unleash their potential and accelerate innovation. Erika is also an Adjunct Professor of Marketing at Temple University and is rarely spotted without a coffee cup in hand.
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