Discounting: A Small Business Death Sentence?

With the recession continuing to take a hold of the American economy, consumers are price sensitive, and always on the look out for a good deal.  For a small business owner discounting is a way to attract customers (promoted by Groupon and many others), but discounting tends to attract the customer who is very price sensitive.  If there is a large disparity between the discounted price, and the normal price for the service the customer may not return.  For example, an owner that initially renders a service like a haircut for $25 has set the price point for the customer to that amount.  If the owner tries to sell the haircut at $65 to that same customer he may not return because of the $40 markup.

Many owners hope to up-sell products and services once the customer is in the store to recoup the costs of the discounting the initial service, but up-selling doesn’t work for every business.  In a restaurant it might be easy to push an appetizer, drinks, or dessert.  But in a hair salon what is there to up-sell, maybe a hair care product?

The type of service being offered also matters when discounting.  Services like acupuncture or dentistry that require an initial setup on the customer’s part means that while the customer might have been initially attracted to a price he will most likely return if the service is good because he has gone through the process of setting up his insurance.

One of the realities small business owners face is that it’s not enough to have a large number of customers walk through their door.  Owners need to be making money off of every customer, and they need repeat business.  Discounting can conflict with both of these goals.  Before discounting owners need to think about the cost structure of each of their offerings.  As a small business owner you want to make sure that the discount you are offering doesn’t dip below the cost of goods or services.  If your margins are low then you have to be even more aware of not giving away your service for free.  The cost structure should also include the minimum number of units that need to be sold to recoup the cost of goods.  In a service based business, owners need to know the maximum possible times the service can be rendered per day, for example, 5 – 1 hour massages or 4 hour and a half massages.

Discounting works especially well as a reward for loyal customers.  Loyal customers will use it as a conversation piece with their friends and family to praise the small business they frequent.  Running the discount as a promotion with loyal customers that requires them to bring in friends or family will help your small business acquire customers.  The loyal customer has vetted your business so the friends and family are coming for the word-of-mouth referral even if they are initially attracted to the price point.

Discounting doesn’t have to be a death sentence.  It can attract new customers and reward existing ones.  The key is to keep track of margins and do it sparingly to avoid price point prejudice.

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