Business and Operations
Marketing insights: Discounting other options
The pizza industry is so well known for its propensity to discount that
some chains have literally made their names from the practice.
The pizza industry is so well known for its propensity to discount that some chains have literally made their names from the practice. As some companies kept offering deeper and deeper discounts (like 2-4-1 being upped by 3-4-1), others joined in the fray and consumers came to expect it as business as usual. Here’s the rub: Every time you discount your products, you’re paying for it out of your profits. It’s called “buying the business” and it can become quite addictive. It can also be quite dangerous.
Bloomberg Business Week’s August 2009 article on food industry discounting highlights the importance of leveraging a price promotion to your advantage. The piece advises that discounting and low price promotions appeal to value seekers and are designed to bring customers through the door. The article warns: “In a recent Marketplace interview, psychology and business professor Kit Yarrow of Golden Gate University asserts that consumers have reached a point in which discount strategies are now so typical that they are no longer bringing in more customers. Worse yet, she says consumers are expecting the lowered prices to remain.” Herein lies the key to pricing as a promotional tool. It can’t simply reward consumers for what they would have done anyway. Instead, it should change their behaviour in some way that benefits your business.
Customer data acquisition
View the discount given as an advertising expense. You could calculate how much each lead is worth to your business. If you ask customers to return the coupon to get the discount and then capture their postal codes when redeemed, you’ll know what geographic area you’re pulling from. You can also ask them to sign up for your e-newsletter or Facebook page. You’ll then have instant access to a large opt-in database of confirmed buyers. Just make sure you cover operating costs and offer the best deal possible.
Drive business into slower periods
If business is slower earlier in the week, a price reduction just for these days might encourage customers to order a pizza instead of cooking at home. One savvy pizzeria managed to shift some volume into an earlier day part by offering a descending discount that started at several dollars off for 4 p.m. sales and levelled off at regular price by 6 p.m.
Make the customer sticky
Value pricing tends to appeal to bargain hunters who will choose whichever brand is on sale. In this instance you aren’t acquiring customers; you’re simply renting them and eroding your margin in the process. Instead, try leveraging your pricing strategy to encourage repeat visits. With a loyalty program, you can reward customers for frequency of purchase. The first visit gets $1 off the pizza.
The second visit gets $1.50 off (if the visit is made within a week or two of the first visit) and the third visit gets $2 off and a free order of fries. If a loyalty program gets customers to visit you more frequently, you may become part of their routine and gain a share of their wallets.
Customers want more than a deal. They want value. Nowhere is it written that you have to go bankrupt to give it to them. Many large chains have tweaked their menus to allow customers the flexibility to have a cost-effective meal. California Pizza Kitchen introduced its small cravings menu, with items in the $3 to $6 range. Qdoba expanded its kids’ meal offerings in the past year and the new Craft 2 menu lets people pick two smaller items for the price of one entrée. Pizza Hut heavily advertised its simplified menu pricing, and the Cheesecake Factory in the U.S. added more small plate offerings to its lineup.
Discounting your selling price may hurt your business more than you know. A 1992 McKinsey study of more than 2,400 companies illustrated the impact that various decisions have on your bottom line.
A one per cent reduction in fixed costs improves profitability by 2.3 per cent, a one per cent increase in volume will result in a 3.3 per cent increase in profit, and a one per cent reduction in variable costs will prompt a 7.8 per cent rise in profit, but a one per cent hike in pricing can boost profitability by 11 per cent.
In the book Value-Added Selling, Tom Reilly states that one in six customers are motivated solely by price. On the other end of the spectrum, one in six shoppers are motivated by value-added features. For the remaining two-thirds of customers, price is an issue but not the issue. Therefore, 83 per cent of consumers are open to a value-added offer in place of a straight discount. Promotional pricing is just one club in your golf bag. If you want to win the game, be sure to use the whole set.
Michelle Brisebois is a marketing professional with experience in the food, pharmaceutical, financial services and wine industries. She specializes in retail brand strategies.