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By Thomas Baekdal - August 2014

Engagement and Discounts vs Sale

I want to talk about an issue that I often see with brands. It's not a new issue by any means, in fact, it has been around for thousands of years because it's the issue of when to give a discount.

Let me illustrate the problem.

Imagine that you have a company that is in decline. Quarter after quarter, your revenue is dropping and your executives are getting ever more anxious. And the CEO tells everyone to do better, while using less money.

As a result, someone in marketing comes up with the idea that the digital world is essentially very low cost. So why don't we focus much more on that?

But how do you actually do that? Well, the same marketing person starts looking at all these social tactics that are supposed to build engagement, and all social studies telling you why people follow a brand on Facebook.

And what he finds is that giving people a discount is not just what people want the most, but also one of the social tactics that creates the highest level of engagement. So that's the new strategy.

Three months later, the executives revisit this plan to see how it went. And your marketing person proudly presents this graph.

Just look at how amazing that is. Your engagement has been catapulted to new heights and is still growing.

Everyone is smiling... except your CFO. He simply asks: "What about sales?"

"Ahaa ..." the marketing person says, "Here is the graph for the number of products sold!" It has returned to previous levels, and better yet, it's no longer in decline.

Now everyone is smiling even more... except, again, the CFO. He just looks even more puzzled, and he says: "But what about sales in terms of money?"

The marketing person looks bewildered, and replies: "What do you mean. Look at these two graphs. We have more traffic and we are selling more products. What else do you want?"

And the CFO says: "Well, I want money so that I can pay our bills? How did this impact our revenue and profit?"

And the marketing person says: "Well, I don't know. In marketing, we only have website analytics. So we can only look at traffic and conversions on our website, but both of those look great. Surely, revenue and profit is up as well... aren't they?"

At this point the CFO stands up and shows the executives these graphs:

And he says: "As you can see, revenue is still in decline. It does seem to be leveling out a bit, but there is of yet no signs that it is recovering. Worse are our profit levels. When these new discounts were introduced, our profits dropped catastrophically, and it is still dropping."

Everyone is shocked, and he continues: "Yes, we are selling more products, but at so high a discounts that we are making less and less money. The frequent campaigns with 'Four4one' in which we are selling four products as one package are actually discounted so heavily that we are losing money on each sale."

He adds, "We are also seeing a dramatic change in inventory. Our new products are selling at a much lesser rate than before, because most of these discounts are for older products. This means that we are failing the reenergize our market. This has caused our growth in loyal customers to drop. And most of the past three months sales have been going to new customers who almost never returns."

To illustrate this, he shows the executives a graph for the sales of the latest product: "The worst example of this was when we launched the new S770 last month. Because it was not discounted, the sale was almost zero. So far we have only sold 209 items, which is less than 700% of a normal product launch. And our partners tell us it's because people are waiting for it to be 'on sale' next month."

At this point, the CEO scowls at the marketing person, the CMO and the Sales Manager with the kind of expression that signifies that they will all be fired before this meeting is over. Yes, they increased sale in terms of items sold, but they didn't solve an already bad problem. In fact, they made it worse.

Obviously, this is just an example, but I frequently come across this scenario, and it is killing so many brands.

The thing about discounts is that it's not a strategy. A discount is a tool that you can use in certain cases to either solve a short term problem you have, or as leverage for a long term result.

For instance, it makes sense to give a discount if you are stuck with old inventory and you need to get it out of your shop/warehouse. So you do a very brief "cleanup sale". And it has to be very brief because, if prolong it, it will negatively impact all new sales for months to come.

It also makes sense to use discount as a leverage to convert doubters. Every brand has three types of audiences. People who have already purchased your products. People who can't decide, and people who don't want to buy.

It will be stupid to give discounts to people who have already decided to pay full price. And trying to convert people who don't want your product with a discount is not very useful either (focus on building up influence and value instead).

But the people who can't decide are interesting. These people want your products, but they need a push. And a one-time introductory discount can be that one thing that makes all the difference.

In neither of these cases, however, are discounts part of a social strategy. It's a tool that you use in very specific cases to change a situation that are otherwise stuck.

There is only one exception to this, and that is loyalty discounts. Basically, these are discounts that you give to people based on how loyal they are. For instance, you could create a loyalty club in which you offer a 5% discount on all purchases once they have purchased five or more times.

This is sometimes a good way to get people to become loyal in the first place.

But remember, this is only a tool to use if you have a problem converting people from one-time customers into loyal customers. If people are already loyal, you basically just lose money by giving them an added discount.

The best brands are those where people want to pay more. This is why a bottle of Coca Cola is three times as expensive as a cola from another brand. This is also why that, if you have a brand that is in trouble, giving people a discount is almost never a thing to do.


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Thomas Baekdal

Founder, media analyst, author, and publisher. Follow on Twitter

"Thomas Baekdal is one of Scandinavia's most sought-after experts in the digitization of media companies. He has made ​​himself known for his analysis of how digitization has changed the way we consume media."
Swedish business magazine, Resumé


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