Discount Pricing: Strategies, Examples & Best Practices for 2024

Discounts are everywhere these days. Whether you‘re shopping online, browsing in-store, or opening your email inbox, you‘re bombarded with offers like:

  • 20% off your first order
  • $50 off when you spend $200
  • Buy one, get one 50% off
  • Enjoy a complimentary gift with purchase

In fact, a study by RetailMeNot found that 80% of consumers are willing to make a first-time purchase with a brand if they found an offer or discount. And according to research by Valassis, 60% of consumers make purchases from brands they normally wouldn‘t buy due to a coupon or discount.

It‘s clear that customers are discount-hungry and businesses are eager to oblige. When done right, discounting can be a highly effective way to:

  • Attract new customers
  • Clear excess or seasonal inventory
  • Increase average order value
  • Encourage repeat purchases and loyalty

However, there‘s also a dark side to the world of discounts. Offer too many deals, and you risk:

  • Training customers to never pay full price
  • Eroding your profit margins
  • Cheapening your brand image
  • Entering dangerous price wars with competitors

So how do you harness the power of discounts without falling victim to their many pitfalls? In this guide, we‘ll equip you with the strategies, examples, and best practices you need to make discounting a healthy part of your overall pricing and promotion strategy.

The Psychology Behind Why Discounts Work

Before we dive into specific discounting tactics, let‘s unpack the psychological reasons behind why customers find markdowns so irresistible.

1. The Power of Perceived Value

At the most basic level, a discount makes customers feel like they‘re getting a great deal. If the original price of a product was $100 and it‘s now on sale for $80, we feel like we‘re receiving $100 of value while only paying $80.

This perceived value is often more powerful than the actual amount saved. According to a study published in the Journal of Marketing, price promotions where the original price was mentioned prominently were more effective than promotions that emphasized the money saved, even when the savings were identical.

2. The Element of Scarcity and Urgency

Discounts also tap into our innate fear of missing out (FOMO). When a deal is only available for a limited time or while supplies last, it creates a sense of urgency and scarcity.

We‘re wired to believe that scarce things are more valuable. The possibility that we might lose out on a great bargain compels us to act quickly and make a purchase before it‘s too late.

3. Our Desire for Smart Gains

Saving money also appeals to our desire to feel savvy and competent. When we score a discount, we feel like smart shoppers who beat the system. There‘s a sense of pride and achievement that comes with knowing we got a better deal than other people.

A study published in the Journal of Consumer Research refers to this as "smart shopper feelings" and found that shoppers who received a coupon for a luxury coffee brand not only had more positive feelings about their purchase but also walked faster with their head held higher compared to shoppers who paid full price.

4. Simple, Pain-Free Savings

Finally, coupons and discounts provide a clear, uncomplicated way to save money without changing our purchasing habits. While tips to reduce spending often involve making sacrifices or tradeoffs, a discount allows us to spend and save simultaneously.

We get to stick with the brands, products, and experiences we want while still enjoying the thrill of spending less than full price.

Most Common Types of Discount Pricing: Definitions & Examples

Now that we grasp the psychology fueling the power of discounts, let‘s explore some of the most popular types of discounts and see them in action.

1. Percentage Discounts

Probably the most common and straightforward type, percentage discounts simply reduce the price by a given percent. The offer is compelling since customers can quickly calculate how much they‘re saving. Some typical examples include:

  • 10-20% off: A sweet spot that offers noticeable savings without feeling like a fire sale. Express frequently takes 20% off sitewide.
  • 25% off: A tier up in savings, often used for Black Friday and Cyber Monday deals like Macy‘s 25% off select items.
  • 40-50% off: Usually reserved for clearance blowouts to offload unsold inventory quickly. Banana Republic routinely marks down styles by 50%.

2. Dollar Amount Discounts

With this approach, a flat dollar amount is deducted from the price. The final discount varies based on the original cost of the item. Some common uses:

  • $5-10 off: Popular for incentivizing purchases of lower-priced items. DSW frequently sends coupons for $10 off a $49 purchase.
  • $25 off $100: Encourages customers to meet a minimum spend threshold. J.Crew often runs promos like $25 off every $100 you spend.
  • $100+ off: Used for big-ticket items like appliances or furniture. Lowe‘s might deduct $500 off select refrigerators priced at $2000 or more.

3. Free Gift with Purchase

Instead of reducing the purchase price, this tactic bundles in a freebie as a reward for buying. The gift can be the primary motivator for some shoppers. Examples abound in the beauty industry:

  • Sephora deluxe samples with any $25 purchase
  • Ulta 4-piece mini makeup set with any $60 purchase
  • Kiehl‘s 4 complimentary travel-size products of your choice with any $125 purchase

4. Buy X, Get Y Free

A close cousin of the free gift, this offer incentivizes shoppers to purchase multiple items to unlock a freebie. It‘s especially popular with consumable goods:

  • BOGO (Buy One, Get One Free): A true 50% savings if you can use the extra item. Payless uses BOGO liberally.
  • B2G1 (Buy Two, Get One Free): A 33% savings on each set of 3 items. Bath & Body Works does B2G1 on body care.
  • B3G1 (Buy Three, Get One Free): 25% off each set of 4 items. The Body Shop is fond of B3G1 on skincare.

5. Loyalty & Rewards Programs

Discounts can also be woven into an ongoing loyalty or rewards program. Customers are incentivized to make repeat purchases to earn points, unlock new perks, or attain a higher status tier. Some creative examples:

  • Sephora Beauty Insider members get a discount during their birthday month based on membership level: 10% for Insiders, 15% for VIB, and 20% for Rouge.
  • Nordstrom Notes rewards members with a $20 Note for every 2000 points (equivalent to spending $2000), which can be used like cash for future purchases.
  • Amazon Prime Rewards Visa Card offers 5% cash back on all Amazon and Whole Foods purchases to Prime members, essentially a 5% discount on every transaction.

6. Bundled & Value Sets

Grouping complementary products together in a value-priced bundle is a smart way to increase units per transaction and average order value. Some innovative use cases:

  • Old Navy leverages the power of outfitting by curating head-to-toe looks and selling the complete set for a discounted price of $35-100.
  • Harry‘s shaving starter set comes with a razor handle, travel cover, shave gel, and replacement blade cartridges for a bundled price of $15 ($5 savings).
  • Fenty Beauty combines top sellers into sets like their 3-piece Glow Trio face set (highlight palette, illuminate, and gloss) for $42 (a $54 value).

Objectives & KPIs: What Are You Trying to Achieve with Discounting?

While the array of discounting options may be tempting, it‘s crucial to wield this tactic with intention and restraint. Avoid offering discounts just because you can or because your competitors are doing it.

Instead, get crystal clear on your goals and key performance indicators (KPIs) for every discount you deploy. What needle are you trying to move and how will you measure success? Here are some common objectives and KPIs to consider:

Objective Key Performance Indicators
Attract new customers – # of new customers acquired
– Cost per acquisition (CPA)
– New customer conversion rate
Increase average order value – Average order value
– Units per transaction
– Revenue per visitor
Clear out excess inventory – Sell-through rate
– Inventory turnover
– % of aged inventory remaining
Improve customer retention – Repeat purchase rate
– Purchase frequency
– Customer lifetime value
Grow revenue – Gross merchandise volume
– Return on ad spend (ROAS)
– Incremental revenue

Be sure to benchmark these metrics before running a promotion so you can accurately gauge lift afterward. And if a discount isn‘t generating a positive return after a few iterations, be prepared to pivot your approach.

Risks & Potential Pitfalls of Overusing Discounts

As effective as discounts can be, there is indeed too much of a good thing. When wielded haphazardly, discounts can quickly go from profit-driver to margin-killer.

Here are some of the dangers to look out for:

1. Damage to Brand Equity

When not managed carefully, excessive discounts can cheapen your brand and make customers question the true value of your offering. They may start to wonder why they should ever pay full price if a discount is always around the corner.

This is especially risky for luxury, premium, or mission-driven brands whose core identity and competitive advantage is quality and exclusivity rather than rock-bottom prices.

2. Unsustainable Margin Compression

Every discount comes straight out of your profit margins. The more you slash prices, the more volume you need to sell to generate the same gross profit. It‘s a precarious proposition.

Many businesses fall into the trap of leaning on discounts as a crutch to boost sales in the short term without considering the long-term impact on margins. Before you know it, your once-healthy profits have evaporated into thin air.

3. Heightened Customer Sensitivity to Price

Over time, a steady cadence of discounts can train your customers to become hyper price-sensitive and discount-dependent. They may start to feel resentful when asked to pay full price.

Once this expectation is ingrained, it‘s incredibly difficult to wean customers off of markdowns and rebuild a willingness to pay a premium. You may find yourself caught in a race to the bottom.

4. Vulnerability to Price Wars

If you‘re not judicious with discounts, you also make yourself vulnerable to dangerous price wars with competitors. When one brand starts aggressively undercutting prices, others often feel pressured to follow suit.

Before long, everyone is slashing prices just to keep up and the whole market suffers from deflationary pressure and eroding margins. No one wins in a race to zero.

5. Friction for Your Frontline

An over-reliance on discounts can create a minefield for your frontline staff, from your in-store associates to your customer service reps. If every shopper believes they deserve a discount, even when one isn‘t available, it leads to frustration on both sides.

Your team may be forced to spend their limited time and energy haggling over promotions and issuing mea culpas rather than providing consultative service and solutions. Discounting can be a slippery slope from empowerment to entitlement.

Keys to Using Discounts Strategically & Effectively

Despite the risks, discounts can still be a valuable tool in your arsenal if you follow these guardrails:

1. Use Discounts Selectively

Reserve discounts for strategic occasions such as new customer acquisition, inventory liquidation, or high-volume seasonal events. Avoid being perpetually on promotion.

2. Set Thresholds & Quantity Limits

Whenever possible, require customers to meet a minimum purchase threshold to unlock the discount. This protects your margins by ensuring you capture enough volume to offset the markdown. Also set quantity limits when needed to prevent discount abuse.

3. Make Offers Exclusive & Time-Bound

Build a sense of exclusivity and urgency into your offers by restricting discounts to certain customer segments or putting a firm deadline on redemption. This frames the discount as a special treat rather than a regular expectation.

4. Anchor in Your Value Proposition

Always pair your promotions with strong brand messaging that reinforces your unique value proposition outside of price. Emphasize the quality, features, and benefits that make your product or service worth paying full price for.

5. Find Creative Alternatives to Price

Look for ways to add value and build loyalty outside of just slashing prices. Could you provide a free gift, exclusive access, or a charitable donation? Get creative with promotions that preserve your margins.

6. Monitor & Measure Relentlessly

Rigorously track your discounting metrics and plug them into your overall profit equation. Know exactly how much headroom you have for markdowns and when your ROI is no longer positive. Don‘t be afraid to experiment and iterate as needed.

Putting It All Together: Building a Holistic Discounting Strategy

Ultimately, the key to effective discounting is to think holistically. Your discounts should work harmoniously with your global brand image, customer experience, and profitability goals.

As we‘ve seen, there are endless levers you can pull when it comes to discount structures, from the type and depth of discount to the qualification criteria and promotional windows. The most successful brands look at discounting through a wide lens.

Some key questions to consider as you build out your own discount strategy:

  • What is the role of discounting in your broader pricing architecture and brand positioning?
  • Which customer segments are most likely to be discount-sensitive and how can you engage them without eroding your base?
  • How will you layer and balance your mix of promotions throughout the year to drive sales without fatiguing your audience?
  • What guard rails will you put in place to protect your margins and prevent over-discounting?
  • How will you equip and incentivize your teams to execute your discount strategy consistently and effectively?

Zooming out in this way will help you develop an intentional approach to discounting that sets you up for sustainable, profitable success.

In a world where bargains abound and customers are conditioned to hunt for deals, it‘s unrealistic to abstain from discounting entirely. But by being strategic, selective, and holistic in your approach, you can harness the upside of this powerful tool while mitigating the many risks.

Here‘s to making 2024 the year of the thoughtful, profitable discount.

Sources:
  • RetailMeNot Incrementality Study (2018)
  • Valassis Coupon Intelligence Report (2018)
  • When More Is Less: The Impact of Base Value Neglect on Consumer Preferences for Bonus Packs over Price Discounts – Journal of Marketing (2012)
  • "Smart Shopper Feelings": Theory and Evidence – Journal of Consumer Research (2015)

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