The dos and don’ts of discounting for small businesses

Growing a small business can be difficult. Some are lucky enough to enter niche markets without much competition. But most have to contend with larger competitors from the get-go.

Larger competitors have more resources, bigger cash reserves, and more options at their disposal for marketing and merchandising their products. This can put smaller competitors at a significant disadvantage.

But the difficulties don't end there. Small businesses have to give customers a reason to choose them over competitors.

Promotional techniques for small businesses

One way many small businesses try to get ahead of the competition and attract new customers is promotions.

Promotions come in all shapes and sizes, but discounts are the most common. They’re very easy to implement and they’re almost universally applicable, regardless of product or industry.

Unsurprisingly, discounts are a popular choice with small businesses looking to get a leg up on their competitors.

A survey of retailers conducted by Software Advice revealed that 99% of respondents used discounting. 

Discounts are a great business tool if used correctly. They’re an effective way to encourage spending and they have a variety of clear benefits:

• Discounts are simple and easy to implement
• They are eye-catching and good for bringing in customers
• They can help increase sales significantly
  

But, like any tool, there’s potential for negative outcomes if discounts are misused. Small businesses should be particularly aware of these potential negatives.

Continuous discounting

Timing plays a key role in discounting. The most effective discounting methods are time-sensitive or dependent on some other variable. All too many brands fall into the trap of continuous discounting, placing discounts on products for long periods of time without any strategic plan. This bad habit is even more dangerous for small businesses.

Continuous discounting can hurt a brand in many ways. Firstly, it can erode brand image and reputation in the long run. There are a couple of reason for this:

• Customers will doubt the quality of the brand’s products and the legitimacy of its pricing strategies
• Competitors may sense desperation and adapt their own business strategies accordingly
• When brands become too dependent on discounts, they may neglect other areas of their brand that are more important for bringing in new customers.

Continuous discounting can also damage sales. This is because:

• The immediate incentive behind a discount disappears completely when customers know it's available at any time
• Demand will dwindle if a discount is in place constantly, leading to a viscious cycle of higher discounts to keep customers interested
• Continuous discounting will hurt a brand's bottom line because they'll make less profit on each item sold
  

So, all in all, continuous discounting is a slippery slope with pitfalls that can catch out businesses of any size. This is especially true with small businesses. But it’s not the only discounting method small businesses should try to avoid.

Generic discounts

Seemingly arbitrary discounts will also hurt a small business's image in the eyes of consumers. The most successful discounts are complemented by contextual factors, such as seasonality, demand, or product availability. These additional factors give discounts greater appeal for consumers, while also providing additional opportunities to increase profits.

For example, a brand can set up a special discount on a particular product based upon current trends in their region or country. This could be a cultural event or even a TV series that spurs a sudden increase in demand for a product.

Consumers will view a brand that senses trends and reacts accordingly in a much more positive light than one with generic promotions.

So, small businesses should remember the following when using discounts:

• The more often your customers see discounts in your store, the less impact they’ll have
• Discounts with a twist are more effective, whether they’re time-sensitive, reactive to current trends, or part of a wider marketing campaign
• Building a solid brand should be your main objective if you want to build a solid customer base
  

For more information about promotions, including discounts, loyalty programs and everything in between, check out some of the downloadable content in our Content Library.