Lowering prices — also known as implementing a sales discount — might seem like a surefire way to turn heads and generate interest in your business, and in many cases, it can do just that. But there are a lot of layers and potentially negative implications to consider when offering one.
Here, we'll get a firmer picture of what a sales discount is, some guidelines for when they're appropriate to implement, and what the term means in the context of accounting.
What is a sales discount?
The term 'sales discount' is a catch-all term for any reduction in price a seller offers for its product or service. That said, the term takes on specific meanings in certain contexts. For instance, in accounting, the term generally refers to a price reduction a business offers in exchange for a buyer's early payment.
Sales discounts have a presence in virtually every industry — perhaps the most prominent forums being retail and ecommerce. Promotional pricing campaigns like flash, seasonal, and clearance sales are some of the most prevalent, well-advertised, and immediately visible examples of sales discounts.
Still, the concept is ubiquitous and extends well beyond those spaces. It spans across every space and can be employed by businesses of almost any scale or nature — from B2B SaaS giants to individual service contractors.
A sales discount can be an effective means of generating demand and revenue, but implementing one comes with its fair share of risks and potentially disastrous pitfalls. Here are some of the most important reasons to consider when deciding whether you should leverage this kind of strategy.
Why Offer a Sales Discount
It can quickly drive sales.
It's a good way to move excess or outdated inventory.
It can help you create demand for a new product or service.
You can attract new customers.
It can help you boost your reputation with specific demographics.
1. It can quickly drive short-term sales.
Offering a sales discount is one of the most straightforward ways to drum up instant consumer interest in your business. Discount pricing strategies like flash or seasonal sales are designed to pique prospects' interest and generate new business within short windows.
If your business is looking for a quick-hitting sales strategy to immediately boost sales, a sales discount is an option worth exploring. Still, it should be noted that this benefit only applies to short-term sales. If you offer some kind of long-standing discount on your products, your customers will come to expect those lower prices all the time.
2. It's a good way to move excess or outdated inventory.
It's fairly self-explanatory, but the products you offer only become "excessive or outdated" when you can no longer reliably move them at full price. If you have unwanted inventory taking up space that needs to be allocated to newer or more desirable merchandise, offering a discount on those products can be an attractive, viable means of getting rid of them with some return.
3. It can help you create demand for a new product or service.
Sales discounts are promotional by nature. They're designed to pique interest, and if you're looking to generate demand for a new product or service, interest is exactly what you need.
A limited-time, promotional discount for a brand new offering can turn some heads and make consumers take a closer look at the product or service you're trying to promote.
4. You can attract new customers.
As I just mentioned, discounts can make consumers take a closer look at your business — and that includes prospects that might not have been interested beforehand.
Budget-conscious consumers often take notice of well-structured, adeptly promoted sales discounts. If you can nail those criteria, you might attract new, potentially brand-loyal customers you would have missed out on otherwise.
5. It can help you boost your reputation with specific demographics.
In some cases, sales discounts can be targeted to attract specific demographics. It's not uncommon for businesses to run promotions offering discounts to seniors or students. If you're interested in zeroing in on and attracting a specific customer base, a sales discount is an avenue worth considering.
Why Not Offer a Sales Discount
It projects a lack of confidence.
It sets a bad precedent.
It establishes a lower perceived value for your product or service.
You can come off as untrustworthy.
It cuts into your profits and can exhaust your sales team.
1. It projects a lack of confidence.
In some cases, a sales discount can come off as you telling your customers, "We don't believe in our product or service enough to sell it at full price." Consumers want quality. If you implement a sales discount — particularly a drastic one — they'll question the soundness of your offering and look to businesses in your space that are confident in their products and services.
2. It sets a bad precedent.
Offering a discount can lead your customers to expect those lower prices, going forward. Consumers get used to price reductions quickly and will be put off at the prospect of paying $50 for a product or service they already got for $40. When your prices go back to normal, many customers won't stick around to pay them and others might hold out until you offer a similar discount again.
3. It establishes a lower perceived value for your product or service.
Sales is the art of conveying value. You're trying to convince a prospect that your product or service is legitimate, helpful, and will improve their life. A sales discount often undermines your ability to do that.
In a similar vein to the first point, a discount might come off you demonstrating that you don't have faith in your own product or service. It can be difficult to convey your offering's value if you're coming in with a discount that implies you, yourself, don't value it.
4. You can come off as untrustworthy.
This point is especially relevant when you’re in the middle of a sale. Say you’ve already laid out the proposal, and you've told your prospect that your standard pricing package is the very best that you can do for them. If they don't seem receptive to it, and it seems like the sale is going south, it could be tempting to offer a discount.
While your prospect might be on board with the lower price, they might be thinking, "They just said their standard pricing was the best they could do, but they offered me a discount when I hesitated. What else haven’t they been honest about?"
Resorting to a discount out of desperation can seem sleazy, and that's something to remain mindful of — particularly when you're nervous about a deal falling through.
5. It cuts into your profits and can exhaust your sales team.
This point might be the most obvious drawback to offering sales discounts. If you don't sell your product or service at full price, you're bound to cut into your profit margins. A 50% discount means you have to sell twice as much to reach your revenue goals.
Piling that kind of workload on your salespeople can take a lot out of them. And spreading them that thin can make them lose out on valuable face-time with prospects.
It might go without saying that discounts aren't always financially sound. It's important to be wary of that point when structuring and implementing one, and always be mindful of the strain that it might place on your sales team.
Implementing a Discount Strategy
Implementing a beneficial discount strategy will depend largely on the type of business you have and your goals. Before offering a discount, consider the following:
Your business goals and objectives: Are you trying to entice new customers, reward loyal ones, increase sales, increase brand awareness, or something else? Get clear about what your objectives are and work to offer a discount that will help you achieve them.
Offering a discount on a particular service or product: Offering a flat discount may not be the right move for your brand. However, you may have surplus product you’re trying to offload that discount pricing may help you clear faster. Are you introducing a new service or feature? You could offer a discount to entice customers to try it out.
Check out competitors: Is your pricing on par with industry competitors? Observing your competitors will give you a better idea of what you should be charging for your product or service. If you’re already charging less than others in the industry, offering a discount may be detrimental to business. If you're currently priced far above the rest of the pack, you may consider offering a discount for a limited time to be more competitive.
Evaluate potential negative effects: While everyone loves to save money, you don’t want to offer a discount if it will negatively impact your business. Think about your customer base. Will they stick around once the discount expires? If you offer a premium product, will a discount harm the brand image? How will this discount impact profit?
Whatever your reasons for offering a discount, make sure they are tailored to your buyer persona and are aligned with your business goals.
Common Sales Discount Strategies
Now that you’ve solidified your reasoning behind offering a discount, let’s look at some common sales discount strategies.
Incentivize current customers to help you find new ones by offering them a discount for referrals. You could offer current clients a discount when one of their referrals signs up for your service or buys a product. A popular option, especially with ecommerce, is to give existing customers their own unique referral link to expedite this process.
2. Early Payment or Prepayment
Offering customers a discount for paying early is a good way to reward loyal customers, increase cash flow and encourage prompt payment. If your business is subscription based, it’s common to offer a discounted rate to customers that pay for the year up front.
3. Value Addition
Depending on your industry, sometimes it is more beneficial to offer additional services in lieu of a discount. For example, if you provide business software, customers may benefit from being able to add users without an additional charge or offer a trial of an upgraded feature. For ecommerce, this could be an offer of free shipping if the customer spends over a certain threshold.
Bundling offers customers a discount for purchasing multiple services at once. This practice is widely common among cable, phone, internet, and insurance companies. Let’s say you need auto insurance. An insurance company may offer a discount if you sign up for auto insurance and add renters insurance. You get convenience and the coverage you need at a discount while the company gets additional business with the extra policy.
There are many more strategies at your disposal, especially for those in the retail industry. We’ll dig into those options next.
Discount Strategy in Retail
Retail environments often offer the most familiar discounts to us — whether ecommerce or brick-and-mortar stores. Below are some common discounts you’ll find in the retail sector.
Offering your most loyal customers a discount is a great way to show your appreciation for their business. Some companies have even implemented membership programs that reward customers throughout the year using a points system or spend threshold.
2. New Customers
Offering a new customer discount is another popular option used by multiple industries from ecommerce to cable providers. These kinds of discounts incentivize customers to choose you over the competition.
These discounts are offered at certain times per year or around holidays. These can include things like Black Friday sales, Memorial Day sales, and others.
These are sales given to customers buying multiples of the same item, like a two for the price of one sale, or buy one, get one (BOGO) free promotions. These are a great way to offload a surplus of a particular item or promote a new one.
5. Abandoned carts
For ecommerce, offering a discount to customers who have left items in their cart without completing the purchase is a great way to reel them back in and convert. If your site is built with WordPress, there are several abandoned cart plugins on the market that will automate this process for you.
Sales Discounts in Accounting
In accounting, a sales discount typically refers to a reduction in payment a seller offers a customer in exchange for early payment. Businesses usually leverage the concept when they're short on and in immediate need of cash.
For instance, a seller might offer a 2% discount for a customer who pays for a product within 30 days of the invoice date instead of some other time during the 90-day window the seller specified.
A sales discount is considered contra revenue — a deduction from gross revenue that ultimately contributes to net revenue. On an income statement, it's typically recorded as a deduction from sales.
Sales Discount in Accounting Example
Let's say there's a business that recently sold merchandise to a corporation for a total sales price of $100,000. The company is given 90 days from the invoice date to pay, but the customer can receive a 2% discount if they pay within 30 days. The initial journal entry would look like this:
If the customer were to pay beyond the 30-day discount period, the journal entry would look like this:
But if the customer paid within that 30-day window, the journal entry would be:
CASH ($100,000 - $2,000)
SALES DISCOUNT ($100,000 x 2%)
Most Effective Discount Percentage
You don’t need to be an extreme couponer to appreciate a good deal. In fact, Statista found that 88% of U.S. residents surveyed in 2020 used a coupon for shopping that year. Discounts are very popular among consumers, but what is the sweet spot to get them to convert?
In his book Contagious, author Jonah Berger uses The Rule of 100 to determine what makes consumers purchase. Berger explains, "The Rule of 100 says that under 100 percentage discounts seem larger than absolute ones. But over 100, things reverse. Over 100, absolute discounts seem larger than percentage ones.”
Let’s say you have an online store that sells sweatshirts. Normally these sweatshirts are priced at $40, but you’d like to temporarily discount them to $30. There are two ways you can phrase this discount: as an absolute number or a percentage.
Absolute: $10 off sweatshirts
Percentage: 25% off sweatshirts
Using The Rule of 100, listing the percentage discount in sales messaging instead of the dollar amount would compel more people to buy. While both options would cost $30, consumers will focus on the larger number, making 25% seem like a better deal.
So while there isn’t a surefire percentage discount that will generate the most sales across all business sectors, messaging makes all the difference.
Discount Pricing Strategy Examples
Now that you’re familiar with the common types of discount pricing companies offer, let’s look at some real world examples.
HubSpot’s Sales Hub offers tiered pricing to suit a variety of needs from small business up to the enterprise level. Additionally, HubSpot incentivizes customers to opt for the annual plan by offering a 10% discount.
Why it works: This strategic discount gives customers a break on pricing and guarantees revenue for the brand at the same time. Plus, committing to an annual plan makes customers less likely to cancel.
Many companies have implemented loyalty or membership plans to reward customers for sticking around for the long haul. Fitness and athleisure brand, Fabletics, follows this model with their VIP membership plan. VIP members pay a monthly subscription and in return get dibs on new items when they drop, discounts, and other perks.
Why it works: Fabletics’ VIP membership is subscription based, allowing the company to harness monthly cash flow from members. Members benefit from discount pricing and the flexibility to use store credits for any months they decide to skip.
Trendy yoga studio Y7 entices customers with big savings if they sign up for an annual plan. Instead of making monthly payments, customers who commit to the annual plan would save 50% on online classes — paying just $96 instead of the $192 regular price.
Why it works: Y7 gets their money upfront while customers benefit from a discount that’s hard to pass up. The limited time offer also creates a sense of urgency to sign up.
Sometimes it’s best not to offer a flat discount but instead offer something of value to the customer for making a purchase. This is the direction mattress company Purple decided to go. What are folks most likely to need when purchasing a new bed? Probably new sheets and bedding to go with it. Anticipating customer needs, Purple opted to throw in bedding with the purchase of certain mattresses.
Why it works: Purple is able to reel in customers without discounting large ticket items. Additionally this offer exposes customers to their new line of bedding and will help build awareness about their new offering.
A great way to find businesses is through word of mouth. What better way to attract new business than tapping your existing customer base? I received the above referral link from athleisure brand Simisienna via email. Not only do my friends get 15% off when they make a purchase using my link, but I get a free gift too.
Why it works: Current happy customers will be glad to recommend your business to friends and family, especially if they are rewarded for their efforts. Referral links are also a great marketing tactic as they can be shared across several platforms, including social media.
Streaming provider Sling opts for two strategies instead of one with the advertisement above. Customers can get a Chromecast device when they sign up if they opt to prepay one month of Sling. Sling doesn’t have annual contracts, but it does offer multiple tiered plans customers can choose from. With this deal Sling can guarantee payment and customers get a cool device to go with their new streaming service.
Why it works: While customers have to pay upfront for this promotion, paying one month makes this deal more accessible. Additionally, Sling can increase new sign ups without having to discount their already competitive prices.
Are discounts right for your business?
Offering a sales discount is a move that could undermine your sales efforts and value proposition just as easily as it could pay off in spades. It's a tough call that requires considerable thought, industry knowledge, and situational awareness.
If you're interested in implementing a discount, it's important to get a feel for how much risk you're willing to assume. And you need to carefully determine whether one can appeal to your prospects and customers without shaking their faith in and positive perception of your business.
This article was originally published August 9, 2020 and has been updated for comprehensiveness.
Originally published Feb 17, 2022 8:00:00 AM, updated February 17 2022