When Lower Prices Hurt More Than Help
Discounts and promotions are a common tool in the marketing toolkit, often used to attract customers, boost sales, and clear out excess inventory. On the surface, offering a price reduction seems like an easy way to drive traffic and close more deals. However, if used improperly, discounting can hurt your brand more than help it, undermining perceived value, eroding profit margins, and conditioning customers to expect lower prices.
In this article, we’ll explore the hidden risks of discounting and promotions, when they can hurt your business, and how to use them strategically to maximize impact without damaging your brand.
1. The Erosion of Perceived Value
One of the biggest risks of offering frequent or deep discounts is the erosion of perceived value. When customers see that a product or service is constantly on sale, they may begin to question whether the original price was justified in the first place. Over time, customers may come to associate your brand with discounting, believing that your product is only worth buying when it’s on sale.
How Discounts Affect Perceived Value:
- Devaluation of Products: Customers may believe that a product frequently discounted doesn’t hold much value or quality. They might think, “If it’s always on sale, why should I pay full price?”
- Brand Perception: Brands that discount too often can lose their premium positioning. If customers are conditioned to buy only during sales, it becomes difficult to re-establish the brand’s value proposition at full price.
Best Practice: Use discounts sparingly and ensure that promotions are tied to specific events or circumstances, such as seasonal sales or product launches, to prevent the perception of constant markdowns. If you’re a premium brand, focus on reinforcing the value and uniqueness of your product to justify your price.
Industry Insight: Luxury brands like Rolex or Louis Vuitton rarely offer discounts because they want to maintain the perception of exclusivity and premium value. For these brands, discounting would undermine the luxury status of their products, which is key to their identity.
2. Discount Fatigue: Training Customers to Wait for Sales
Frequent or poorly timed promotions can lead to discount fatigue, where customers are trained to wait for a sale before making a purchase. This creates a dangerous cycle in which customers no longer feel urgency to buy at full price, knowing a discount is just around the corner. Over time, this erodes your business’s ability to sell at regular prices.
How Discount Fatigue Hurts Your Business:
- Delayed Purchases: Customers hold off on purchasing, waiting for the next sale. This can create unpredictable cash flow and inventory management challenges.
- Loss of Pricing Power: Once customers are conditioned to buy only during sales, it becomes increasingly difficult to justify full prices. This diminishes your control over pricing and profitability.
Best Practice: Avoid the temptation to offer constant discounts. Instead, focus on value-driven promotions, such as bundling or offering limited-time offers tied to specific events. This creates a sense of exclusivity without conditioning customers to wait for sales.
Industry Insight: Retailers like Macy’s and J.C. Penney struggled with discount fatigue in the past. Frequent promotions conditioned customers to only buy during sales events, which led to a cycle of declining margins and a loss of full-price sales. Both companies have since adjusted their strategies to focus on value-based promotions and limited-time offers.
3. Margins at Risk: The Danger of Discounting Without Strategy
Discounts can significantly impact your bottom line if not carefully planned. While slashing prices may increase short-term sales, it can also erode profit margins, especially if the discounts are deep or frequent. In some cases, businesses may find themselves selling products at a loss if they haven’t accounted for fixed costs or inventory expenses.
How Discounts Impact Profitability:
- Reduced Margins: Offering discounts without careful consideration can eat into your profit margins, especially if your cost structure doesn’t allow for much flexibility. Deep discounts can turn profitable products into loss leaders.
- Customer Expectation of Lower Prices: If customers expect constant discounts, they may be unwilling to pay full price, leaving you with thin margins or forced markdowns to meet demand.
Best Practice: Carefully analyze the financial impact of discounts before launching promotions. Ensure that any discount still allows for acceptable margins, and use promotions as part of a broader strategy to drive volume or customer acquisition, rather than a long-term pricing strategy.
Industry Insight: Fast-fashion retailers like Zara and H&M strategically use sales to clear out seasonal inventory, but they’re careful to keep discounts within ranges that maintain healthy margins. These brands rely on well-timed promotions rather than constant markdowns to avoid damaging their profitability.
4. Decreasing Brand Loyalty and Quality Perception
While discounts can bring in new customers, they can also attract deal-seekers who lack brand loyalty and are more likely to jump to a competitor offering a better deal. Moreover, frequent discounts can negatively affect how existing customers perceive your brand’s quality.
How Discounts Affect Loyalty and Perception:
- Attracting Price-Sensitive Shoppers: Customers who buy only when there’s a discount may have no long-term loyalty to your brand. They’re likely to switch to a competitor if they offer a lower price.
- Questioning Quality: Consistently discounted prices can lead customers to question the quality or value of your product. If it’s constantly on sale, they may wonder if it’s truly worth its original price.
Best Practice: Rather than using price as the primary driver, focus on building brand loyalty through exceptional customer experience, high-quality products, and rewards programs. Use discounts sparingly and strategically to reward loyal customers or as part of a customer acquisition campaign.
Industry Insight: Starbucks uses discounts strategically, such as offering a free drink after a certain number of purchases through their rewards program. This approach incentivizes customer loyalty without devaluing their core product offerings or creating an expectation of constant markdowns.
5. Using Discounts and Promotions the Right Way
Despite the risks, discounts and promotions can still be powerful tools when used strategically and sparingly. The key is to approach discounting with a clear objective in mind, such as moving excess inventory, acquiring new customers, or driving urgency around a specific event.
How to Use Discounts Effectively:
- Tie Discounts to Specific Events: Rather than offering year-round sales, tie discounts to specific events like holidays, seasonal changes, or product launches. This creates urgency and ensures customers see the promotion as a special opportunity rather than the norm.
- Use Discounts for Customer Acquisition: Discounts can be effective for acquiring new customers, especially for subscription-based services or products with high lifetime value (LTV). A discounted first month can be a great way to attract customers and convert them into long-term buyers.
- Reward Loyalty: Instead of offering discounts to everyone, reward loyal customers with exclusive promotions or offers. This builds customer loyalty without devaluing your brand or creating a discount-driven culture.
Best Practice: Set clear objectives for any discount or promotion and measure its impact. Ensure that any discount aligns with your broader business strategy, whether it’s for customer acquisition, inventory management, or brand awareness.
Industry Insight: Beauty brand Sephora uses a tiered loyalty program that offers exclusive promotions and discounts to its most loyal customers. This encourages repeat purchases and builds long-term customer relationships without devaluing its premium product lines.
When to Use Discounts and When to Avoid Them
Discounts and promotions are a double-edged sword—while they can drive short-term sales and attract new customers, they can also erode perceived value, hurt profitability, and condition customers to wait for markdowns. The key to using discounts effectively is to deploy them strategically, with a clear understanding of their potential long-term impact on your brand.
By focusing on value-driven promotions, rewarding customer loyalty, and maintaining a strong brand image, businesses can use discounts as a powerful tool without falling into the trap of devaluing their products. Remember, the goal is to enhance the customer experience and align your pricing strategy with your brand’s value proposition, ensuring that lower prices help—not hurt—your business in the long run.
Do you want to 2x, 5x or 10x your Profits?
Download the Playbook and connect to tailor or Join our Master Class Club: Join for free
Want More:
- Connect on LinkedIn
- Checkout more on this Pricing Series
- Checkout more Book Review in this series
- Connect for more free material and coaching
- Connect for more.
