6 Ways to Offer Discounts and Still Make a Profit

These discount strategies give your customers a great deal without undermining the value of your products.
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Discounting is a game. Learn the ins and outs to make sure you're maximizing profits at your small business. (Photo: 10incheslab/Shutterstock)

Retailers know that knocking a percentage off a best-selling product is a surefire way to drive business into your store. But why?

“People love to feel that they’re getting a special price. There’s an excitement for them, and that in itself has a value for your store,” said consumer psychologist Bruce Sanders, author of “Retailer’s Edge: Boost Profits Using Shopper Psychology.”

But discounts and promotions can be a double-edged sword for small business owners: not only can they cut into your profits, but if done improperly, they may also cause your shoppers to doubt the quality of your products or the trustworthiness of your pricing.

These six psychology-backed strategies will help ensure your discounts pay off for both your shoppers and your bottom line.

Explain why you’re discounting

In order to keep the value of your discounted products high in customers’ minds, make sure they know why the items are on

sale, said Sanders.

“We want to give our customers a firm sense that the pricing policy makes sense, that our pricing of items is not arbitrary,” he said. “It makes more sense to the shopper and it builds repeat business if there’s some reason for the sale.”

Tracking how customers respond to different types of sales will help you develop a discounting strategy that works for your store. Sanders offered some common reasons store owners decide to mark down the price of products:

  • To match or beat competitor’s prices
  • To create excitement
  • To encourage purchases of picked-over stock
  • To clear out excess inventory at the end of a season
  • To phase out certain products or brands

“Markdowns are most effective when shoppers feel they know the reason for the discount, so use your analyses to decide how to best present the markdowns,” he said.

Related: The Art of Selling to Tightwads

Don’t go too low

Even though a major doorbuster discount might attract crowds, Sanders warns against dropping the price of your products too low. “When putting items on sale, set the discount at a price low enough to draw in customers, but not so low as to make the customer think the item is of unacceptably low quality,” he said.

To determine the right amount to discount, start by thinking about the level of quality customers associate with a particular product, advised Sanders. “Discounts on items considered to be high quality are substantially more effective than are discounts of equal amounts on items thought of as lower quality.”

In other words, you can get a similar sales lift by knocking 30 percent off a budget brand as you would by discounting a premium brand by just 10 to 15 percent.

Related: How to Develop a Pricing Strategy for Your Small Business

Be sure to continue to promote the desirable features of the products, said Sanders. Spotlighting things like safety features, awards and other unique qualities will keep the value of the item high in the minds of shoppers — no matter low the price gets.

So how do you know when the discount is too much?

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When pricing items and implementing discounts, never go so low that you lose money on an item. (Photo: luchunyu/Shutterstock)

“When people start to doubt the quality of item, that’s one indicator the price is too low. And when your sales revenues are going down, you’re giving up too much. You should never be in a position of losing money on every sale just to make it up in volume,” said Sanders.

Consider progressive discounting

Progressive discounts can be an effective way to move time-sensitive merchandise, like fashion. For example, said Sanders, “For the first three weeks, leave it at full price. Then, take 10 percent off for the next three weeks, and 20 percent off for the following three weeks.”

This strategy allows you to earn higher profits from customers who care about being one of the first to have an item, while allowing you to reward shoppers who are willing to wait and purchase a product that’s losing its “cool” factor.

However, this strategy can backfire if the product is more practical than trendy, said Sanders.

“Customers will start to question why they should buy the item right now if they expect you to keep reducing the price. While fashion is something to keep up with, customers are willing to wait for utilitarian products.”

Related: What Small Businesses Need to Know About Dynamic Pricing

Odd pricing and “up to” discounts

Pricing your discount just below a round number is a winning strategy for keeping profits high during a promotion. Not only does offering 39 percent off, instead of 40 percent, keep an extra bit of cash in your pocket, it plays into customers’ naturally positive outlook on shopping during sales.

bruce-sanders

“Precise numbers lead to us assuming more restricted ranges. If you see a sale of ‘up to 39 percent off,’ you’re more likely to think all of the percentages are going to be closer to 39 percent than you would if the discount was ‘up to 40 percent off.” -Bruce Sanders (Photo: Bruce Sanders)

“Consumers are, by and large, an optimistic lot. If you advertise ‘up to 40 percent off regular prices,’ many will think the item they’re seeking will be one of those tagged for close to the full discount,” said Sanders. “You’ll attract almost as many shoppers as you would have if you’d offered the 40 percent cut on all the merchandise.”

Using odd pricing has an added benefit of giving shoppers hope that the item they seek will be discounted the maximum amount, said Sanders.

“Precise numbers lead to us assuming more restricted ranges. If you see a sale of ‘up to 39 percent off,’ you’re more likely to think all of the percentages are going to be closer to 39 percent than you would if the discount was ‘up to 40 percent off.’ The shopkeeper has a better chance of getting customers back in the store.”

Related: Why 99 Is the Magic Number for Pricing Products

Play games of chance

Getting customers to “win” a discount will get them excited about your sale without reducing the perceived value of your products. Sanders recommends inviting your customers to play games of chance, like scratch-off tickets that reveal a discount.

“The psychology behind this is that people will attribute the discount to their luck or to having done a bit of work. This leaves undisturbed their sense of the customary price for that item,” he said.

Other games of chance to consider include lotteries, raffles and prize wheels. However, be careful to avoid gambling games, said Sanders. Games that require players to bet money are not usually legal without special permits, so check with your small business attorney first.

Never give it away for free

No matter how deep your discount goes, don’t give your products away for free, said Sanders.

“A problem in giving deep discounts on items is that it devalues the items for when you return to normal pricing. With the ultimate deep discount (free), you may very well attract lots of takers, but those takers probably won’t fully appreciate what they’re getting,” he said.

Research shows that buy one, get one free deals risk devaluing your products, said Sanders. He recommends charging a nominal amount, like $1, rather than giving the extra item away for free.

“Consumers have an easier time recognizing the value of a big discount when charged even a token price than when getting it for free,” he said.

Related: 5 Pricing Strategies That Will Work For Your Small Business

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