Josh Kaufman

Josh Kaufman is the bestselling author of books on business, entrepreneurship, skill acquisition, productivity, creativity, applied psychology, and practical wisdom. About Josh »

On Discounting

When you visit any retail store, you’re likely to hear one word more than any other: “Sale." Many retail stores are also in the process of going out of business. There’s a relationship between the two.

Here Comes the Sale…

My wife, Kelsey, is the sales manager at the Mark Ingram Bridal Atelier in Midtown Manhattan. Mark is the most respected stylist in the bridal fashion world, and Kelsey routinely sells gowns that range in price from $4,000 to $21,000. Over the years, I’ve learned a lot from Kelsey about the impact of discounting and how to use it constructively.

The bridal market in New York has been heavily impacted by the financial markets: most of Kelsey’s clients work as bankers or attorneys on Wall Street. In general, people are more worried about their finances than usual, and it’s taking them longer to decide to purchase a gown - it’s not atypical for a bride to take 4-5 appointments before deciding to purchase a gown, whereas before the market meltdown the same type of bride would take 1-3 appointments. That directly affects sales rate: if the atelier is booked solid but people take longer to buy, that means a higher percentage of your appointments don’t result in a sale. When you’re paying five-figures a month on rent for a Park Avenue studio and salaries of a staff of 15, that’s potentially a major issue.

Fortunately, the Mark Ingram Bridal Atelier is doing just fine for two simple reasons:

  1. They focus on providing excellent customer service.
  2. They refuse to heavily discount.

“Turn and Burn"

Some of the atelier’s biggest competitors are the “big box" stores of high fashion: Kleinfeld Bridal and large department store bridal salons. Their primary strategy is the same: (1) attract as many potential brides as possible, (2) close the sale quickly, then (3) deliver the finished product while investing as little additional time and energy in the customer as possible. The analogue in the restaurant world is “turn and burn," as defined by the Urban Dictionary :

“The method by which a server will try to get a table out of his section as quickly as possible. This method is especially useful when dealing with customers who are not spending a lot of money and therefore, will not leave a big tip. Popular methods include… anything that will expedite the process of getting those cheap customers the hell out of there."

When revenues start declining, the response of these stores is predictable: the sales signs start appearing everywhere. Huge advertised discounts usually bring in more customers to “turn and burn" - even if they ultimately bring in less revenue per customer. Huge discounts also allow these retailers to liquidate the huge amounts of inventory they often keep on hand. (Example: Saks Fifth Ave just closed 13 of its 15 bridal stores and brought all of the merchandise to New York for a massive sample sale, with advertised discounts of 50%+.)

How to Compete With Discounters

It’s hard to stay in business when your competitor is offering a substantial discount on the very same merchandise, right?

Counterintuitively, it’s not - these practices actually bring more customers through Mark Ingram’s doors, and are a primary factor in closing sales.

Sure, a bride may be excited about the possibility of a substantial discount on a high-end gown, so she visits the big box store. Inevitably, the bride has a very poor experience: the sales associates are pushy, the process is rushed, and the store clearly cares more about collecting the bride’s money than helping her find “the one." The experience is so off-putting that brides are visibly relieved when they return to Mark’s atelier - it’s clear that the staff cares about helping her find the perfect dress and will go to enormous lengths to ensure that she has a great experience, so she buys - even though in most cases she’s paying a premium. The service makes it worth it.

Why Discounting is Typically a Bad Idea

To make the same amount of revenue, you must sell more units. For example, if you slash prices by 50%, you must sell twice as many units to bring in the same amount of revenue. While it’s likely that you’ll sell more units at a lower price, doubling your unit sales is uncommon. Even if you successfully double sales, handling the increased volume may put a serious strain on your business’ people and infrastructure, which has very real costs in both the short and long term. In the bridal example above, the “big box" bridal retailers are under enormous pressure to produce results quickly, so they end up rushing the process - resulting in unhappy brides and stressed out salespeople.

You decrease your customer’s perception of quality. The psychology of pricing is a fascinating subject: in general, people believe that more expensive products are more desirable and have higher quality. When you lower your prices, you change the way people perceive your product or service.

Less revenue means less cash flow available for business improvement. Slashing prices is the start of a death spiral - a self-reinforcing cycle that ends up harming or destroying the company. When you cut your profit margins to bring in new customers, you’re directly harming your ability to create new products, make prospective customers aware of what you have to offer, hire employees, and provide outstanding customer service. By shortchanging these critical business processes, you’re trading your business’ long-term prospects for a short-lived infusion of cash that’s smaller than it should/could be.

How to Respond When a Customer Asks for a Discount

Recently, a prospective customer asked Kelsey why she wouldn’t offer a bigger discount. Here’s what she said:

Being a small specialty store, we have a different ability to discount than [our competitors]… In the retail stores, they’re discounting merchandise they already own just to get some cash in the door. Being a special-order business, we don’t own anything that’s coming in, so we have the same bills to pay either way.

What we’re really selling is our time and our service. We specialize in alterations, customer service, and providing a personalized experience. That’s really what you’re paying for - our time. If we were [to discount], something on the other side would have to go, as well. For example, we’d have to limit you to two fittings, and say that you can never call or e-mail because I wouldn’t have the time to talk to you. (Which is exactly the model of [big box stores] -"Here’s the biggest discount we can offer you, now don’t bother us again.“) This scenario is not the way we want to do business, and so we can’t discount to the same level.

I know this was a long, drawn-out email to a simple question, but I wanted you to know that we really do want to help and we want you to have a fabulous experience, and we also have to ensure that we’ll still be around when it’s time for your wedding.

The bride purchased the dress, and is a very happy customer. Be very clear what people will give up if you charge a lower price - people understand that tradeoffs exist in every business. As long as you’re able to communicate the benefits they’ll receive, customers will gladly pay the higher price. Gracious honesty really is the best policy.

Charge Premium Prices That Are “Worth It"

Avoid discounting as much as possible - charge premium prices for a premium product or service. In the immortal words of Morris Rosenthal :

“Any business can buy incremental unit sales at a negative profit margin, but it’s simpler to stand on the corner handing out $20 bills until you go broke."

Here’s the million dollar question: what can you provide that will make people happy to pay a premium price, even if your competitors discount? Don’t compete on price: delivering what people value most is always the best business, even in the toughest financial times.

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