Article Contributed by Anand Srinivasan
Startup entrepreneurs have a very distorted view of how discount marketing campaigns work. It is commonly believed that the only way to penetrate a saturated market is by offering massive discounts. In other words, discounts are merely seen as a way to generate sales where none exist. However, this couldn’t be further from the truth. Discounting campaigns go beyond price wars and are instrumental in changing consumer habits and behavior.
Creating incentives for new customers
Products and services cost money. This creates a barrier for prospective new customers to try them out on a whim. This is especially true for customers who are not already paying for an alternative. A good example of this is Uber. Unlike on-demand cab services, traditional taxi systems do not require passengers to share their credit card information. This creates a hurdle for companies like Uber that want customers to try their service. One way to bring down the barrier is by offering free rides for new registrants. The prospect of riding the service for cheap creates an incentive for users to provide their credit card information. This way, services like Uber and Lyft successfully bring new customers to their system.
Changing consumer habits
If you are entering an industry where your competition is already well-established, then a discount on new registration would only help with customer acquisition and nothing more. Retaining these customers and training them to habitually move away from your competitor’s product to yours takes a lot more effort and resources. This requires a sustained strategy where discounts are recurring in order to nudge the customer towards developing a habit over time. For instance, online food delivery startups send promo codes to customers everyday during lunch and dinner hours to building this habit in consumers. The actual return on this investment is only gained after these consumers become regular users who order food even in the absence of discounts.
Last minute deals
If you are in a business that deals with branded products (smartphones, computers, etc.), then no matter how loyal your customer is to your store, they are likely to shop for cheaper deals before making a purchase. It may however not make sense to advertise promo codes right on your website. In doing so, you could be losing out revenue from customers who may have purchased from you even without a discount. What companies like Walmart do instead is to promote discounts as direct mail coupons. This way, customers shopping for coupon codes get access to these during the purchasing process while other loyal customers who are not seeking discounts may transact at the market prices.
A discount on the selling price is a notional loss for your business. You should therefore discount marketing very judiciously. It is important to identify specific challenges and metrics where you want the needle to move and launch discounts that target these metrics specifically. Launching a marketing campaign that offers an umbrella discount on all products and to all kinds of customers is a money sink and should be strictly avoided at all costs. This is especially true if you are a bootstrapped startup that does not enjoy the luxury of big spending like VC-funded startups.