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The Problem With Fake Discounts | Strategic Pricing Solutions

If you are a seller employing the large discount strategy, you should analyze your transactions to see what proportion of your sales are transacted at the full list price.  If only 10% to 15% of your sales are at list price, it is pretty clear your customers recognize the fake discounts.  Unfortunately, it is not an easy problem to fix.  Most companies who go down that path become addicted to the perceived lift they get from higher-than-average list price increases.  They also know their customers won’t buy from them without the discounts.  If they lower their list prices to be more reflective of the actual value of the product or service, they will find it extremely difficult to lower their discounts by corresponding amounts.  Their customers are equally addicted to them, and will not invest the time in analyzing all the prices to ensure they are no worse off.

Grainger is a good example of the difficulty of changing.  Early in 2017 they announced that they would systematically begin to lower the list prices on many of the 400,000 SKUs they carry.  Through nine months this year, sales are up 2% (basically in line with market growth) but gross margins are down 2%.  They have been unable to lower the discounts enough to offset the list price reductions.

The bottom line from all that is to resist the lure of the fake-discount pricing strategy.  There could be short-term gains from it, but also long-term pain.  It is still important to segment your customers and charge more where the value you provide is greater, but focus on the net prices you are charging across all segments.  You should compete for business on the value you bring including product assortment, service quality, convenience, speed of response, etc., as well as price; and avoid too-good-to-be-true pricing.

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The Problem With Fake Discounts.

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