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Monday, January 18, 2010

What Garfield Can Teach Us About Price Discounting

Discounting can be bad for your small business. Even Garfield seems to get this. But why don’t small businesses? First let me explain the Garfield reference. My young son was watching an episode of Garfield the other day while I was riding the exercise bike diligently trying to work off the Holiday pounds. Although I was reading a great book on marketing I couldn’t help but notice what the episode was about- Pizza and marketing (sort of). You see, Garfield’s owner Jon decided that he would forego ordering from Garfield’s favorite pizza restaurant because he had a coupon to a new pizza place. But the thought of cheaper pizza did not thrill Garfield, in fact, he was totally unenthused at the idea. Why? Because Garfield had tasted this budget pizza and it was awful! It had the texture of rubber and it tasted like cardboard.

The pizza was cheap because it had been made by a machine that automated the whole process and could turn out 10 pizzas per minute. It was a very efficient process that made the cost of the pizza dirt cheap. The problem was the quality- it was terrible- thus the reason for the discount. The owner of this cheap pizza producing restaurant had to give out coupons- and he even offered Jon further discounts- to get customers to buy. I understand this owner’s reason for discounting his product. It was inferior and he had to do something to be competitive. What I don’t understand is why some small businesses do it.

For the most part, discounts signal inferior quality. Why do small, independent restaurant owners who produce superior quality meals and experiences feel compelled to discount their products? Why do retail stores with owners and employees who know their customers by name and that carry specialty products not easily found anywhere else in the local market resort to cutting their prices when times get a little tough?

Don’t misunderstand me. I’m not talking about the occasional discount to introduce a new product or business to the market (especially a new market) or a coupon given to drive traffic to your store or restaurant during typical slow times. I’m not even talking about discounting as a last resort. What I am talking about is the constant discounting and couponing that goes on as if the establishment were a mini Wal-Mart. And businesses that start discounting soon after a drop in sales or a recession without trying other approaches first. Unless you compete in a budget/discount type of industry, these kinds of discounting practices are detrimental to your business in the long term- and perhaps the short term as well. For more information on the problems with discounting see my article “The Pitfalls of Discounting” in my latest newsletter.

There are times and places for discounts for some small businesses, not all, but some. And there are right ways and wrong ways of doing this. Be smart when you discount or offer a coupon. Have a specific business goal and competitive reason for doing it. Don’t just do it because your competition is doing it or they have “everyday low prices” that are lower than yours. In fact, don’t compete on price unless you know you can win the battle and the war. And don’t discount at the first sign of a business slowdown. Price is not the only reason customers shop elsewhere. Even in bad times there are customers out there who will appreciate your superior offering and pay the higher price. Concentrate on finding these customers before you even think about discounting. That is most likely your ideal customer any way.

So learn this valuable lesson from Garfield: Discounting often associates your product or brand with lower quality. Be ready to counter that perception or use it to your advantage if you are going to employ this pricing tactic. If you are going to offer discounts or some other kind of price concession, introduce them wisely and for a limited time. Be specific with yourself and your customers why you are doing it and stress that this will not be a long-term deal. For more information on how to properly use discounting, see my top 7 tips in this short article “How to Discount Price Without Jeopardizing Long Term Profits and Brand Image” It is available in my latest newsletter, which you can sign up for here.

Be strategic with your use of discounts to avoid negative consequences. Or better yet, just don't use them at all.

To your success!

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