In 2003, researchers Dholakia and Simonson used eBay to see how customers really respond to discounts. They sold the same album – Pink Floyd’s ‘The Wall’ – on two different occasions. In the first, the album was sold for $0.99, and in the second, the advertised price was $6.99. Even though the product was exactly the same, the more expensive option had a higher sales rate.
While many entrepreneurs believe that slashing prices is a sure-fire way to attract customers, studies show that discounts can have the opposite effect on sales. Discounts devalue your product by taking the customer’s attention away from the product itself by focusing only on price. Low costs invite customers to draw their own conclusions about the quality of the product – as they did in the eBay study. It triggers a ‘too good to be true’ feeling in the mind of the customer who will trust their gut and take their business elsewhere.
Additionally, discounts have the potential to erode trust and loyalty – both with existing and new customers. If you can’t sustain the low prices in the long-term, the customers who were lured in by the cost will fall off as soon as prices are raised. Moreover, customers who paid full price in the past may feel cheated when they see what they missed out on. As a result, they may swear off your brand completely.
Discounts can be dangerous for an entrepreneur, especially if they end up dragging your premium product down to match the price of an inferior competitor. In this case, you end up selling a high quality product for a much lower profit margin. Ferrari would never drop their prices dramatically just to shift sales. The truth is, if your product is good enough, customers will be willing to pay a premium price.
Rebel entrepreneurs know that selling a product on discounts alone is not sustainable. They use strategy to determine price – they conduct research and tap into the collective wisdom of consumers. A rebel entrepreneur will never devalue their product – they stand by its worth.