An Expert's Guide to Discounting

Cutting prices without cheapening your image or losing full-paying customers is an art. Timing and flexibility are crucial

By Teri Evans

Browse Issues

Browse the BusinessWeek Archive

Dan Saelinger

Story Tools

• post a comment
• e-mail this story
• print this story
• order a reprint
• suggest a story
• digg this
• save to del.icio.us

Dan Saelinger

Think before you slash. That's the advice John Quelch, a professor of marketing at Harvard Business School, gives to business owners tempted to cut prices. "You don't want to give away your profit margin to customers who still would have paid full price," he says.

Whether they're following Quelch's advice or acting impulsively, nearly 30% of small business owners say they have lowered their prices, according to a February survey by the National Federation of Independent Business. "They're struggling and asking, 'What can I do to save my business?'" says Martin Lehman, an adviser with the New York offices of SCORE, a nonprofit business counseling group.

If sales are hemorrhaging or customers are flocking to dealmaking competitors, discounting might be necessary. That's especially true if you've already exhausted other options, such as offering consumers extra perks or improved service. But chopping prices is not without risks, including a cheapened brand image and customers who will never pay full price again. And if there's no demand, even signs that scream "Lowest Price Ever!" won't draw customers. "The primary factor that determines the price you're going to get is what the demand is," says Roland Rust, chairman of the marketing department at the University of Maryland's Robert H. Smith School of Business. "In a situation where people want things less, the price has to be right."

To discount successfully, you need to take a look at what your competitors are up to, then analyze your company's previous experience with promotions. If discounting is uncharted territory, you might experiment with a short-term sale to test the waters or, if you can afford it, bring in a research firm to gauge customer responses to proposed price cuts.

You'll also need to avoid the common blunder of sacrificing quality or customer service so that you can lower your prices. "Once a company gets a reputation for poor quality, it's hard to turn that around," says Rust. Another mistake is discounting too heavily. Depending on your industry, a 10% discount may actually be quite attractive, Quelch suggests. And avoid the sledgehammer approach of slashing prices across the board. Instead, trim prices on specific products or services—those that are slow-moving or have higher margins.

The key is to dish out deals without purging your profits. Here are six survival-mode strategies from pricing experts and the entrepreneurs who are making them work.

CUSTOMIZE

If you suspect your clients are particularly price-sensitive, start by asking them what they need, and then change your mix of offerings to emphasize the most affordable. That's exactly what Debbi Somers did at her 17-employee, $1.7 million Las Vegas company, Somers Furniture, which mostly rents and manufactures pieces for the events industry. As the convention business slowed and orders for custom-made furniture dried up, her sales slumped 26%. Somers knew she had to act fast. By mid-2008 she was offering to redesign furniture for her clients, rather than replace it, at one-third to one-half the cost of starting from scratch. "We can take the furniture a nightclub has been using for, say, 10 years, bring it into our warehouse, and redo it," Somers says. Refurbishing now accounts for about 25% of her business, making up for the losses in the rental and manufacturing divisions. "We can't sit and wait for business to call us; we have to aggressively go out there and get it," Somers says. "And if we have to reinvent ourselves again, we will."

TIME IT RIGHT

Make your promotions and sales efforts more effective by targeting customers when they have the most cash to spend. Often, that means paydays. Retailers "need to have their products on promotion in stores during the first week of the month, after checks have arrived in people's accounts, rather than the fourth week, when [buyers are] much more poor," Quelch says. When Nicole Donnelly launches promotions or new designs for BabyLegs, her Seattle children's leg warmer business, she alerts her retailers and customers via an e-newsletter. Donnelly tested the timing until the verdict was clear. "

Business Exchange

Track and share business topics across the Web.