Some businesses try to make a go of it by living (and often dying) through discounting. It can be a way to build up a quick initial customer base. Unfortunately, businesses will often attract the most price-sensitive customers with this approach. Unless your name is Walmart (and a few others), price-sensitive and bargain-shopping customers are not typically the base on which you want to build a long- lasting and successful business. There are three main downsides to the discounters approach.
When a business trains customers to look for discounts and bargain sales it can often disrupt the normal business cycles. If customers know that discounts are coming, they will often not buy a product in the interim. The business is then either forced to deal with severely uneven cash flow or to accelerate the perpetual cycle of discounting. Walmart has the volume to support perpetual discounting. Most other businesses do not.
Emphasize Price Competition
With an emphasis on discounting, a business reduces its competitive advantage to price competition. That's not a place that I want my business to be. Competing on price is usually won by the largest volume seller. The volume sellers can use their volume to leverage lower prices from suppliers. Most small to medium-sized business do not have the power to do so.
Make Customers Mad
I recently had an experience with Hobie polarized sunglasses that I want so share as an example. I bought sunglasses from the company directly several years ago using a 50 percent online discount. My glasses are great glasses but were getting older, and I needed a backup pair. Due to my previous purchase, Hobie mailed a Father's Day special of 25 percent off that I shared with my wife. She purchased a pair for me and I was happy until a week later. At that time, Hobie emailed me a 50 percent off discount code which made me mad that we had missed the additional 25 percent off. I went from a happy customer to a not-so-happy customer because of the timing of Hobie’s various discounts.
While some companies operate in the discounting and special-event sales world, it's a dangerous place to be. If your business is doing so, take a closer look to see if that is the best approach for the long-term and customer loyalty. Some alternatives to price competition are offering superior products or services, product innovation, and company culture. I firmly believe that product innovation is the best space in which to operate and differentiate a business. How can you make your product or business different?
My goal today was to cover the dangers of relying on discounting and price competition and to encourage businesses to look elsewhere for competitive advantages.
Adam Shay, CPA (NC License Number 35961), MBA, is managing partner of Adam Shay CPA, PLLC. He focuses on minimizing taxes and improving the financial results of entrepreneurs, and is actively involved in supporting the Wilmington entrepreneurial and startup community. For more information, visit http://www.wilmingtontaxesandaccounting.com/ or email him at [email protected]. He can also be reached by phone at 910-256-3456.
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