The Consequences of Price Reductions

Reading Time: 5 minutes

Offering discounts on products might seem like a legitimate option for small to medium-sized business owners, but is it?

It’s safe to say that lowering prices through discounts is like playing with fire. If you aren’t 100% sure of what you are doing, it’s not something we would recommend.

Many B2B business owners opt for discounts to provide the best possible deal, thinking they can make up the loss through volume, which is no easy feat. Even to maintain a marginal profit of 20% with a discount of a mere 4%, they will have to increase the sales by at least 25%.

And not every business can obtain that type of growth.

With that in mind, let’s see how discounts work for B2B businesses and the ways they should (and should not) be implemented.

Think Twice Before You Discount

Different customers value your product at different price points, meaning they will have different exchange rates for your offering. Consumers calculate this amount depending upon the value they can derive from your product. Take a look at this price elasticity graph that shows how different segments of your target audience value your product differently.

Chart of pricepoints

When business owners find a price range favorable to their audience and business, they usually take a step further by giving their customers a discount (in B2B, these are mostly volume discounts).

What do you think happens here? Is it all rainbows and sunshine? Unfortunately, No.

By discounting, you have conditioned your buyers to devalue your product. Discounting works well in the retail space because businesses can easily create urgency by limiting the supply. However, cracking discounting strategies is challenging in the B2B service space. Since the supply is practically unlimited and non-physical, customers are used to so many promotions and discounts that they are sure of offers coming down the pipeline.

And, when the price is back to normal, you will see a huge drop in customer retention. Buyers will start to churn out in the first month itself, wasting even more money on onboarding, marketing, and extraneous costs.

The problem will only worsen if you think of gaining customers through discounts. Even though discounts are different across industries, customers who get discounts on their first-month value the product at least 12% less than its actual price.

And, for freemium, the devaluation goes as low as 47%.

Chart - comparing promotion and discount strategies

Discounts are never a good way to gain loyal customers; they can be used to promote purchases in certain situations but not consistently.

When should you offer discounts?

Discounts in B2B can be used in certain situations. Your business just has to find the right balance between when they can or cannot be offered. These are some ways where discounts would work fine-

  • To gain new customers

When you are just starting, discounts can help drive traffic or create demand for your product. Sales discounts are designed to trigger interest amongst people looking for an option like yours but are budget-conscious. You can launch time-limited discounts to attract your target audience.

  • To sell outdated or excess inventory

Often, businesses are left with products that they can’t sell off or that have become outdated. And, when you can no longer sell products at full price, discounting is a good option. You might have to cut down a little on profit, but you get rid of unwanted products and find space to stack up the latest items.

  • To drive short term sales

Offering discounts is the most straightforward way to drive traffic to your business. Discount practices like one-time offers or seasonal sales help you reach more people and close higher deals. However, such effects are quite short-term; once people purchase a product at a discount, they don’t want to return to the original value.

When to not offer discounts

Now that we know where we can add discounts let’s dive in to understand when including discounts is a big NO-

  • Customers undervalue your product

For business owners that think providing discounts is a straightforward way of winning customers and getting consistent cash flow, then you might be wrong. Most leaders who did that have spent a lot extra recovering the CAC and getting further customers. Once you establish that your products can be charged less, the buyers do not think spending additional money is worth it.

  • No customer retention

The business-to-business model is already quite complex, and adding discounts just complicates your dealings. When someone is offered discounts, they assume that more offers are coming down the pipeline, even if they miss it this time. The aim of creating urgency has rotten off with discounts. So, when the price is brought back up, there is a low willingness to pay, leading to Lower Lifetime Value (LTV) and a higher churn rate.

  • Showcase your disbelief in the product

Business is all about value creation. Anyone will only purchase your product when they think it’s worth the value it provides. So, when you discount your product, you are automatically lowering its value. Your buyers will surely question the authenticity and trust of your product. So unnaturally discounting your products isn’t an excellent option for the long run.

Discount or No Discount?

We are not saying that providing discounts is entirely wrong, but you need to put the right strategies to work this buying model. Some of them can be-

  • Don’t offer a discount to everyone; only do it for people who need that extra push. Also, make sure the discount is priced well and is not undervaluing your product.
  • Time-limited discounts work well if your product shows them that the full price you charge is worth the value it provides.
  • Look for alternatives to offering a discount, like creating an entry-level product that acts as a lead magnet for buyers to buy more of your higher-value offers.
  • Lastly, if you think your product is worth every penny, you don’t need unnecessary discounts. We have seen brands with a no-discount policy doing so well. They have established their authority in the niche, and now they don’t even need to get more customers on discounts.

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