Small businesses with a solid pricing strategy can still be perplexed with the concept of discounting. The advantages are obvious - the business attracts a high volume of customers in a short period of time and builds a customer base responsive to price. The disadvantages however, are many, starting with the larger businesses and mass retailers able to sustain their lower prices based on their superior relationships.
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A larger retailer has the luxury of economies of scale2 which gives them a lower price per unit with its suppliers and producers based on the large quantities that they can sell. With an inbuilt larger margin, the mass retailer is able to not only gain larger profits for the same item as a smaller business, but it can also discount a product without losing a base-line profit in the existing market. They can also reduce their costs and increase their margins by simply buying and owning the suppliers that produce their items. They then can keep their leading market position based on what is called vertical supplier chain integration3 as well as their ability to use economies of scale.
Small business with little buying power, lower volumes, unable to buy their suppliers and producers businesses and have difficulty in sustaining discounts without losing valuable profit need to be sceptical and cautious about discounting when it appears in their market space. Some small businesses who haven’t given discounting enough time and thought will see the discounts in their category may wonder if they should follow suit. A clear disadvantage of discounting for a smaller business is that consumers will start to associate a lower price with lower quality of product or service. This customer may perceive that the product or service is an end-of-the-line, hard to sell item and that the discount is the business’ an attempt to move that particular stock quickly4.
Being the smaller fish in the sea means a shift in thinking about discounting products. The shift being toward not doing it.
Even with a 10% reduction in a product it will result in a much higher level of effort from the smaller business to claw back the same amount of money as they would receive had they not given the discount in the first place. Discounting devalues a product or service more especially if a price rise wasn’t instigated before the reduction.
A way to combat a competitor in the market who is intent on discounting is to switch tactics, focus on just one or two customer items, provide a clear benefit that is different from rivals and do that one item with super efficiency so the business is able to gain maximum profit5. If a price war between businesses means your business loses customers and probably much more, don’t do it. Discounting is not the way to go.
References:
1 http://smallbusiness.chron.com/discount-pricing-strategy-794.html
2 http://www.investopedia.com/terms/e/economiesofscale.asp?layout=infini&v=5F&adtest=5F&ato=0
3 http://www.investopedia.com/terms/v/verticalintegration.asp?layout=infini&v=5F&orig=1&adtest=5F
4 http://www.letslearnfinance.com/advantages-and-disadvantages-of-discounts.html
5 https://hbr.org/2006/12/strategies-to-fight-low-cost-rivals
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