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Is the boost in traffic worth the tradeoff?

Why Discounting is Almost Always a Bad Idea

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It can be bad not only for your bottom line but also for the very respectability of your brand.
By Adam Guild July 2019 Expert Insights

Providing a discount sounds like a good idea. If you cut prices for a limited time, you’ll see a spike in sales and you’ll attract a host of new customers, right?

The truth is that discounting is can do real damage. It can be bad not only for your bottom line but also for the very respectability of your brand.

I’m going to share with you the reasons why you should think twice before offering discounts, and what you should do instead to attract customers and keep them coming back.

Discounting is a bad idea because people will choose you based on price rather than the experience

Think about the last time you got a great deal on something. When you described it afterward, did you talk about the experience or the savings?

If you’re like most people, you’re more likely to remember the discount than the details. And a one-time discount does not build loyalty.

Loyal customers are the most valuable customers to a business, with the 10 percent most loyal spending three times more than the bottom 90 percent.

And the key to creating loyal customers is to get them to experience what you offer several times. It takes 37 percent of customers at least five visits to consider themselves loyal.

Once you have established that loyalty, customers are willing to pay for what you offer. Nearly 40 percent of loyal customers will spend more on something, even if they can find it cheaper somewhere else.

So how are you going to create customer loyalty if people are only coming into your restaurant to get a great deal? You’ll have to offer that deal over and over again just to get them in the door.

And even if you do get them to come back several times with the discount, they’ll disappear as soon as the discount does.

Now, if your goal is to be the absolute cheapest hot dog vendor in town, I have some bad news for you.

Discounting is a bad idea because someone is always willing to go cheaper

Discounts attract bargain hunters who only want a great price. So it may seem like you should cut your prices to attract the cost-conscious consumer, right?

In fact, this is a dangerous game to play.

Yes, cutting prices may result in a sudden uptick in sales. But as soon as someone else goes lower, the customers will leave you to chase the lower price.

Why should people buy a full price pizza from you when they can get one for half off from the pizza joint down the street? There are so many better ways to promote your pizzeria.

Bargain hunters generally don’t exhibit brand loyalty. But these are the kinds of customers you’ll attract by getting into a price war with your competitors.

Then, it’s just a race to the bottom, and everyone loses.

You can even lose to yourself with this kind of discount.

Some restaurants do daily specials, offering discounted items on certain days of the week. You have to be careful with this.

After all, why would customers come in for full-price wings on Wednesday when they could wait a day and get 10-cent wings on Thursday?

Instead, you have to differentiate yourself in a different way.

The Kodiak Club

Maybe you can offer more types of wings than the competition. Or maybe you can serve the absolute best French fries in town with your wings.

There is an unlimited number of different promotion ideas that will attract customers without requiring discounts.

But seeing who can provide the cheapest option is a good way to ruin your food cost and come up short when it comes time to pay for the necessities like labor.

3. Discounting is a bad idea because big businesses can always underprice you

It’s not simply a matter of competitors being willing to underprice you. There’s also the fact that big businesses are simply better equipped to underprice you.

This is due to the economies of scale. The more of something you produce, the cheaper each unit becomes.

Just look at McDonald’s.

The burger giant is the undisputed ruler of restaurant sales volume. They made it one of their huge selling points up until the mid-90s, posting their sales numbers on their signs.

You can still track their estimated sales by the second at website Every Second, and the numbers are mind-boggling.

When you’re selling an estimated 6.5 million burgers per day, you can control your vendor prices in a way that no one else can compete with. McDonald’s can sell a Quarter Pounder with cheese for a staggeringly low $3.79.

No new burger chain can produce a decent burger at that price, and it would be a mistake to try.

Instead, chains like Shake Shack have to charge more and find a different selling point.

Shake Shack’s ShackBurger, also a quarter pound of beef, costs $5.79—a full $2 more than the same size burger at McDonald’s. But the chaines focus on the quality of what you’re getting instead of the price.

Shake Shack

Their website promotes all-natural Angus beef, non-GMO buns, and other premium ingredients.

Shake Shack

Shake Shack knows that to compete with McDonald’s on price, it has to sacrifice on quality. And its quality is what keeps people coming back.

4. Discounting is a bad idea because customers who come for the discount don’t stay at full price

Have you ever used a discount site like Groupon or Living Social? If so, did you ever return to that place at full price after you used your discount?

If you’re like an estimated 87 percent of people, you didn’t.

People who are getting a discount grow accustomed to it, and it skews their perception of the value of your product. They’ll hold out for another discount before they’ll come back.

To see what happens when discounts go away, just look at what happened to retailer JCPenney.

For many years, JCPenney’s pricing structure was discount-based. Prices were regularly cut by up to 50 percent, making consumers feel that they were getting a great deal.

But in the early 2010s, the retailer shifted their strategy away from regular discounts, and towards more standard low prices.

It was a disaster.

This “everyday low price” strategy changed people’s perception of the brand, despite the fact that prices were almost the same. Consumers no longer felt like they were getting a great deal, and they stopped coming to the store.

Bloomberg

This misstep, combined with the growth of online retail, put JCPenney into a sales slump that it still hasn’t emerged from.

The more discounts you provide, the more you reduce the customer’s willingness to pay.

 

Discounting is a bad idea because it cheapens how your experience is perceived

Apple.

Ferrari.

Louis Vuitton.

What do these brands make you think of? I would imagine it would be some combination of expensive, exclusive, and high-quality.

Guess what these brands don’t do? Discount.

They know that in order to be a premium brand, they must cultivate the perception of luxury and strongly defend the value of their products. The same principle applies to restaurants.

By discounting your food, you create the idea in the customer’s mind that somehow the food was only worth the discounted price, rather than the full price. Stick to your guns, and stand by your pricing.

You don’t have to be a high-end steakhouse with a $70 porterhouse on the menu to think this way.

If you serve slow-roasted carnitas that takes 8 hours to make, a discount can turn your lovingly crafted pork masterpiece into just another taco. Your tacos deserve better.

Look at this person’s realization after his own experience with a Groupon:

“I had the realization [sic] that good restaurants don't use Groupon because they don't have to—word of mouth is much more effective. Bad restaurants use Groupon because they have to—and any place that can discount so much for their customers makes me question how ridiculous their prices are to start.”

Conclusion

You probably noticed that the name of this piece is “Why Discounting is Almost Always a Bad Idea.” There are a few instances where discounting can help you.

First of all, there is a place for a loyalty program in your restaurant. What makes a loyalty program special?

Instead of giving a lower price carte blanche to everyone, loyalty programs reward repeat business. Letting customers earn a free appetizer through several full-price visits builds sales and customer retention over time.

This can turn more of your customers into that all-important top 10 percent of loyal spenders.

Adam Guild is a top expert on restaurant marketing. He is also the CEO of Placepull: a technology company that helps restaurants increase revenue by an average of over $207,000 per location using search.