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To discount or not to discount?With unemployment increasing and business closures a daily event, many businesses are turning to discounting in order to lure the customers in. But is this actually the right thing to do?

The purists would argue that all discounting does is destroy brand value. So when is it right to discount and not to discount?

This seemingly innocuous question is much more complex than it first appears and leads to arguably one of the most complex questions in business. To answer the question in detail we need to first understand why price is so important.

Along with place, product, promotion and people, price is one of the essential five Ps of marketing. A pricing decision is the only one of the five Ps which directly and immediately impacts your bottom line. Price also plays a key role in the buyer purchase decision and is often the difference (especially in tougher times) between buying and not buying.

While there are many approaches to setting price, this article reviews the question from a marketing strategy and branding point of view.

The marketing approach to pricing

We believe, like any of the other marketing Ps, that pricing must be set in conjunction, and be consistent with, your marketing strategy. To illustrate the point, let’s examine the computer market and the Apple Mac versus the PC.

Now, I am not about to go on a free-for-all let’s bash the PC, but it does provide a perfect example of pricing strategy from a marketing point of view.

Last week, I visited the new Apple superstore on George Street, Sydney, looking at a new Mac. Apart from the sheer visual appeal of a Mac, what was highly evident was that Apple charge a premium of at least $1,000 to $1,500 more than a comparable PC with the same specs (I know its not the same—heresy!). What’s more, there were no discounts and no special offers, just the price plus the addition of an extra $500 to $1,000 in software.

Compare this to buying a PC where PC manufacturers apply discount after discount. For instance, I recently purchased three laptop PCs for a retail venture and the cost of those three (after store discount and $100 cashback from the manufacturer) was about the same price as the one Mac!

Whereas I don’t expect a discount from Apple, I have been conditioned to expect—even demand one—from a PC. This may account for some of the reasons why Apple reported a record first quarter net profit for 2009 during the current economic crisis (with plans to open another 25 stores according to Macworld).

What this example demonstrates is a company’s positioning plays a significant role in determining its overall pricing strategy and whether discounting is consistent with the strategy.

To discount or not to discount?

Most often, the question is not “should I or shouldn’t I?” but rather “must I or mustn’t I?”. In many cases you may not have a choice as discounting may be part of your normal sales strategy and not a response to the current market. Therefore it’s not necessarily dependant on your positioning. Examples of this are clearing of old stock, sales cycles of your distribution channels such as department stores requiring discounting at key times during the year, or new entrants into a market employing a penetration strategy and deliberately discounting to gain market share.

But if you do have a choice, how do you determine whether you should discount? We advocate a ‘think before doing’ philosophy, so the place to logically start your consideration is to look to your marketing strategy and in particular how differentiated you are relative to your competition. Differentiation in reality can be seen as a proxy for the strength of your brand. Typically, the stronger your brand the higher price you can charge relative to your competition.

Assess your current positioning to see if a price discount is consistent or inconsistent with that positioning, or necessary depending on your competitors’ pricing strategy.

If you have low differentiation and hence are easily interchangeable in your consumer or client’s mind, a price discount is not only consistent but also an effective tool in driving additional sales. In addition, your consumers/clients may well expect or demand a price reduction in down times, and you will most likely need to maintain your price position compared to your competitors. However, if you experience high levels of differentiation, reducing your price to increase sales or stimulate demand, may be unnecessary and inconsistent with your brand’s positioning.

A word of warning

You should exhaust all other options before resorting to price reductions. Discounting per se is a little like becoming a drug addict. It might provide you with the kick, the stimulus you are looking for in the short term but beware; once hooked it’s a mighty hard habit to kick and you may find like many before you, that you’ll need a lot more than a methodone treatment to wean yourself off the habit.

Apple, through its strength of a sound positioning (and ‘cool’ products) differentiates its brand and products to the level that the purchase price decision within their target customer’s mind is far less important than their desire to just have it. The ultimate position to be in is to have a differentiated product and a cost structure that allows you to completely change the way business is conducted. Reducing your price at this point would simply cause confusion in your consumers’ minds. As a successful businessman said to me just today: “Sometimes you have to be prepared to say no to business. If they are demanding a price decrease, it is more important to keep the integrity of the brand.”

In conclusion

In reality, price may not be something you have complete control over. If you are in an undifferentiated market, you will be forced to follow your competitors, otherwise you will be perceived as expensive for your offering. The companies that rise above their competition in these turbulent times are those that successfully differentiate themselves from their competitors. These companies don’t have to, and often shouldn’t resort to discounting. Differentiation is not only about product innovation, but also about branding. Is a Mac really better than PC? That is an argument that will have no conclusion. But is Mac’s brand better than PCs’ brand? With that, there is little doubt.

—Jason Eisner is co-founder of BrandQuest (www.brandquest.com.au).

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Jason Eisner

Jason Eisner

Jason Eisner has 20 years of strategic marketing and operations experience in senior management and consulting roles. Jason has a Bachelor of Commerce from UNSW and an MBA from the Kellogg Graduate School of Management in Chicago, learning from the marketing guru Dr Philip Kotler. He has worked in the US with Andersen/Accenture and The Cambridge Group (a Chicago and New York based boutique marketing strategy company) and in Australia with many small and large businesses. Jason is known for his strategic and lateral thinking.

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