Does a Discount Pricing Strategy Make Sense for Small Business?

Author: Mark Alves via MyBusiness Mag Date: December 10, 2012

Pricing tips for small businessNever charge less than what it costs to produce goods or services. Period. And if it ever comes to that, consider whether selling those goods or services makes good sense, says Mike Gatti, senior vice president of member relations for the National Retail Federation.

The trick to discounting properly is avoiding cutting into the bottom line too deeply, or too often: Do it in a way that increases overall transaction value or brings customers back for repeat visits—not in a way that encourages customers to wait for sales, or think your initial prices are not the “real” price.

 “A good way to discount is ‘Buy X, get Y at 50 percent off,’ or ‘Buy three, get one free,’” says Barry Berman, president of NexPet Retailer, a national co-op of independent pet stores based in New York. Cross-promote among related products: If people buy dog food, give them a discount on treats or toys. Those discounts are often effective in promoting impulse purchases. Even affluent customers appreciate a discount.

To encourage repeat visits, give out coupons good toward future purchases. If the average customer comes in once a month, make the coupon good for three weeks to bring them in sooner. One month, Cindy Dickey, an NFIB member who owns a Merle Norman Cosmetic store in Enid, OK, let every customer who walked through the door choose an envelope. Each contained a gift certificate worth between $5 and $100. “They could bring it back the following month, unopened, and whatever day they brought it in, we opened it, and they could use it that day,” she says.

    RELATED: Groupon Do's & Don'ts

Some independent stores cut their prices to compete with large businesses and online competitors. It’s true that technology has made it easier than ever for consumers to compare your business’ prices with those of a national or even local competitor. And the rise of deep-discount providers like Groupon is perpetuating this infatuation with “deals” and low prices.

Handling In-Person Shoppers Checking Online Prices

NFIB member Dewayne Burgess, who owns Western wear shop Roy Frey Western Lifestyles in Topeka, Kan., has encountered this problem. “I used to have a lady come in and tell someone on the other end of her cell phone that ‘Something is $89 here, but it’s $79’ at [a competitor],” he says. “We knew she came in just to compare prices, but we never said anything to her.” Burgess says he can maintain slightly higher prices than his competitors because he stays rooted in the community—sponsoring local rodeos and providing awards merchandise for 4-H competitions. But that value proposition didn’t land with this customer until a friend pointed it out.

“One day, she came in with a friend who happened to be a repeat customer of mine. The friend saw what she was doing and said ‘You ought to be ashamed of yourself. That other store doesn’t provide the awards and buckets for your kids’ 4-H program like Roy Frey.’ From then on, that activity stopped,” he says.

The lesson: In the era of daily deals, don’t make discounting a knee-jerk reaction. As a small business owner, you have more to offer than a quick turn of sale. You add more value to a transaction than a simple “Are you ready to check out?”

Read next: 4 Way to Maximize Your Advertised Discounts

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