Discounting is something that we love to talk about in the hopes that we will drive additional sales, but will it drive additional profitability? In this post, we are going to discuss why discounts are not necessarily bad and the proper way you should use them.
To start, discounting should not be your first line of defense. Most organizations see discounts to boost sales, but the research shows us it is very easy to miss this mark. In fact, my own observation is that many associations believe more people will purchase, subsequently increasing their bottom line. Why does this often fail?
First, discounting hurts your profit margins. When we discount, we typically need to see at least 5-10% to make anyone think the discount is worthwhile. When you account for the volume needed to make up for that discount, analysis usually finds that you will not gain the market share needed at scale to improve bottom-line profitability.
If you are offering a digital training for $100 and your direct and indirect costs total $60, a 10% discount hurts your profits by 25%. Not accounting for the difference in fixed and variable costs, for every 3 tickets you sell to this digital training, you will need to sell 1 additional to hit the same profit. Therefore, if you will not increase enrollment by over 33%, you are losing money by discounting.
Second, if you discount too drastically and without proper pricing strategy, your offer can reek of desperation. This triggers to your members that what you are offering is not worth the value you said – ultimately that you did not do the proper work of evaluating your pricing and value for this offer. You never want your members to lose trust in your value as an organization.
So how do you properly discount?
The key to discounting is to have your audience perceive the value as slightly higher than it is to get them off the fence, not necessarily to increase sales. Discounting allows for you to price anchor and say a particular offer is normally worth a certain amount, but we are making this a no-brainer by building in a discount. The best starting place is to determine your real price, then add slightly to it – usually 10%-30% – to buffer in space for the discount.
One association I worked with had an event that was priced at $1,000 but offered an early bird rate that brought the price to $800. To the public, this was a steal at 20% off. To the association, it was really $800, and they budgeted for everyone to pay that amount, and anyone who did pay $1,000 added additional revenue. Psychologically, most shoppers are looking for a deal, so offering a discount allows them to remove the need to negotiate or question every feature of your offer in the pickiest of ways.
When you do discount, do not just offer one discount. If you are going to discount, it is proven that offering two layered discounts moves sales the most for those on the fence.
For example, if you are offering a virtual event for $1,000 and members receive $100 off plus there is an early bird rate for another $200 off, stack these from smallest to largest. Do not combine the discounts into one. Which moves you more?
- “Our event is 30% off for members by December 1!”
- “Members receive 10% off plus a 20% early bird discount for registering by December 1!”
With the second, it feels like an extra special bonus. Again, put the smaller discount first because a smaller discount at the end will feel anti-climactic. Going from smallest to largest feels like an even greater victory for the price-sensitive shopper.
By combining discounts and using discounting as a strategy to move those sitting on the fence rather than mass-scale acquisition, you can keep healthy profits for financial sustainability while serving value to match the price you’re truly charging.
Dr. Michael Tatonetti is a Certified Association Executive and Certified Pricing Professional on a mission to advance associations in their pricing models for financial sustainability. As a Trainer and Strategic Consultant, he works with organizations to harmonize pricing and value across membership, education, sponsorship, and events. He is also an Association Executive with Professional Pricing Society overseeing education, certification, and strategy for marketing, membership, and sponsorship. Dr. Michael creates new content every week on pricing for associations at www.michaeltatonetti.com.