How to Discount (If You Insist)

Discounting can wreck brand value and profits. Follow this discount strategy to avoid those pitfalls

By Steve McKee

Discounting stinks.

As a marketer whose job is to create preference and profitability for my clients, I don't like discounting. In fact, I hate it. I call it the D-word. It's distracting. It's demeaning. It's destructive and depressing. And yet I see companies do it all the time.

These days discounting is more prevalent than ever. Now into the second year of our economic tsunami, we are getting used to headlines bemoaning declining sales and shrinking profits across virtually every sector of the economy. The current issue of the Harvard Business Review even coined the term Post-Recession Consumer, whose "new thriftiness and desire for simplicity" will change business for a generation. Just this month Yahoo! (YHOO) introduced a new Web site called Yahoo Deals, offering coupons, information about limited-time promotions, and even a cheap gas finder. The company reports that searches for the term "printable coupons" are up 50% this year because, as Greg Hintz, head of Yahoo Shopping, puts it in a recent Brandweek piece, "Frugality is the new 'cool.' "

Many companies are getting caught up in the frenzy and slashing prices. Even marketers who should know better—those who have made big bets on discounting in the past and lost—have not been immune. Both McDonald's (MCD) and Burger King (BK) recently fought public skirmishes with their franchisees over the price point of their low-end burgers. Their corporate offices want to drive traffic, but franchisees complain that it does them no good to sell any product at a loss. And Macy's (M), the nation's dominant department store chain, lowered its price on a popular line of men's slacks in an effort to generate sales. While the decision resulted in "tremendous sell-through" according to CEO Terry Lundgren, it also required "low price points and no margins," an article in The Wall Street Journal quoted him as saying.

Discounting destroys brand equity, hamstrings investment in innovation, and zaps profitability for companies and their stakeholders. Which raises an interesting question: Can discounting ever be an acceptable strategy for a business?

Rules for discounting wisely

If there's one thing I've learned in more than two decades as a consultant, it's never say never. There may be times and places where a discount can make sense to achieve a limited, well-defined objective. That said, discounting should be rarely used and carefully managed. Let me suggest three rules of thumb that should be kept in mind if (when) you begin flirting with the discount beast.

First: Discount briefly. Discounting is like a drug. Employed for a limited time to treat a specific condition, discounting can have its place. But like a drug, it's addictive. Companies that get hooked on it do little more than drive their value proposition down, sometimes past the point of no return.

This is one reason why department stores have been in decline over the past two decades, launching Red Tag sales as soon as their Red Apple sales are over. They discounted so often that they trained customers not to shop if there wasn't a sale going on. (My firm even produced a campaign for a retail client that spoofed how department stores would look for just about any reason to discount, such as the "Life's Not Fair" and "President Polk Day" sales.)

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