Use These Discounting Strategies to Grow Your Profits

Posted by Moira McCormick on May 16, 2017
Moira McCormick

Use These Discounting Strategies to Grow Your Profits.jpeg

Have you already decided on the base price of your products or services?  Congratulations!  However, what about your policies regarding discounting?  There are many different forms of implementing price reductions, each designed to accomplish a specific purpose. Some of the most popular discounting strategies are described below:


Quantity discounts

These are reductions in base price given as the result of a buyer purchasing a predetermined quantity. A non-cumulative discount applies to each purchase and is intended to encourage buyers to make bigger purchases.

This means that the buyer holds the excess merchandise until it is used up, providing the advantage of cutting the inventory costs of the seller and preventing the buyer from switching to a competitor at least until all the stock is used.

A cumulative quantity discount applies to the total bought over a period of time - the buyer adds to the potential discount with each additional purchase. Such a policy helps to build repeat business.

In the USA, home improvement stores Home Depot and Lowes offer a contractor discount to customers who buy more than $5,000 worth of goods. Home Depot has a tiered discount for painter/decorators, who can save as much as 20% off if they spend $7,500.


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Seasonal discounts

These are price reductions given for out-of-season merchandise - artificial Christmas trees and decorations discounted during the summer, for example.

The intention here is to spread demand over the year, which can allow fuller use of production facilities and improved cash flow during the year.

Seasonal discounts are not always straightforward. It seems logical that gas barbeques are discounted in September/October when the garden barbeque season is over, and hot tubs are discounted in January when the weather is often freezing.

However, in the States, the biggest discounts on large-screen televisions are offered during the weeks before the Super Bowl when demand is greatest. This strategy aims to drive impulse purchases of this large-ticket item.


Cash discounts

These are reductions on base price given to customers for paying cash or within some short time frame. For example, a 2% discount on bills paid within 10 days is a cash discount. The purpose is generally to accelerate the cash flow of your organisation and to reduce transaction costs.

Generally, cash discounts are offered in a business-to-business (B2B) transaction where the buyer is negotiating a range of pricing terms, including payment terms. In a department store, it is highly unlikely that you would be offered a discount for using cash instead of a credit card.


Trade discounts

These are price reductions given to middlemen (e.g., wholesalers, distributors, retailers) to encourage them to stock and give preferred treatment to a particular organisation’s products.

As an example, a consumer goods company might give a retailer a 20% discount to place a larger order. Such a discount might also be used to gain shelf space or a preferred position in the store.


Personal allowances

These discounts too are aimed at middlemen. Their purpose is to encourage middlemen to aggressively promote one particular organisation’s products. For example, a furniture manufacturer may offer to pay some specified amount toward a retailer’s advertising expenses if the retailer agrees to include the manufacturer’s brand name in the ads.

Some manufacturers or wholesalers also give retailers money to be passed on to the retailer’s sales assistants as a reward for aggressively selling certain items. This is most common in the electronics and clothing industries and used primarily with new products, slow movers, or high-margin items.

When employees in electronics stores recommend a specific brand or product to a buyer they may receive a "bonus" from the manufacturer on top of their wages and commissions from the store.


Trade-in allowances

These reduce the base price of a product or service and are often used to help the seller negotiate the best price with a buyer. The trade-in may, of course, be of value if it can be resold. Accepting trade-ins is necessary for marketing many types of products but is most common in the motor trade and with equipment manufacturers.


Price bundling

This is a very popular discounting strategy and entails grouping similar or complementary products together and charging a total price that is lower than if they were sold separately. As an example, Microsoft bundles Microsoft Word, Excel, Powerpoint, OneNote, and Outlook in the Microsoft Office Suite.

The underlying assumption of this pricing strategy is that the increased sales generated will more than compensate for a lower profit margin. It may also be a way of selling a less popular product - in this case Microsoft OneNote - by combining it with more popular ones. Industries such as financial services, telecommunications, and software companies make very effective use of this discounting strategy.




Discounting can add extra benefits

Discounting is not the right strategy in every situation but with the right discipline and control, discounting can add extra benefits to your business. According to research conducted by PriValEdge, companies that exercise good discount rules can see a 5% increase in volumes and 60% increase in profit. Perhaps one of the discounting strategies mentioned could be what your business needs.


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The Strategy and Tactics of Pricing, Tom Nagle and John Hogan 2016

Marketing: Concepts and Strategies, Lyndon Simkin and Sally Dibb 2016

Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table, Reed K. Holden and Mark Burton 2014

Topics: Discounting, Profits, Discounting Strategies

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