Companies Beware: Discounting = Death

By Lior Arussy of Strativity Group

NEW YORK (TheStreet) -- Doing more with less is the prevailing corporate mantra in today's business climate. Even though the Bureau of Labor Statistics revealed an increase of 290,000 jobs last month, the nation's labor pool is still drastically smaller than it was two years ago. Poll a cross section of employees and nearly all will say they're doing more with less -- one person doing the work of three -- and while they may be happy to have a job, the job itself is a lot tougher.

I hear this from clients not just in the U.S., but around the world. My answer to their pleas for more resources is simple: STOP DISCOUNTING! The correlation between discounting and the downward corporate spiral is obvious -- the excessive use of discounts to generate revenue and retain market share does not work.

The assumption that during a new product launch, discounts and coupons increase the number of customers seems logical. Similar logic may be applied to corporations that use similar tactics to increase market share. But in reality, discounts make products available to a customer segment that does not appreciate the products at their original price. These are unprofitable customers and when they are allowed to join the existing loyal customer pool, they poison it.

These customers come with the same expectations as the loyal customer except they demand their expectations be met while paying the discounted price. As such, they are demanding service they did not pay for. Companies are then forced to provide the level of service expected with fewer resources -- hence a labor shortage. Companies simply cannot afford to deliver the expected customer service on the reduced margins they generate.

This is where the vicious downward spiral begins. Diminished service and inferior customer experience leads to disappointed customers. Disappointed customers rarely return unless a desperate corporation offers deeper discounts. These discounts are even more unprofitable than the original discounts...and so the cycle continues until the business fails.

When discounts are introduced as part of a product launch, it is often difficult to raise prices afterwards. The discounted price often becomes the permanent price thereby establishing the product as a lower value player. Conversely, if the discount is offered later in the sales cycle, the existing customers are offended that they didn't receive the same consideration.

As new products arrive this summer, the winners will be those who do not discount their way into the market. Today's customers demand exceptional customer experiences. The successful customer-centric company will establish relationships with the loyal customer base that sees value in the company's product at full price.

It is time to forego the obsession with market share and instead focus on the profitable customer -- the customer who appreciates the existing value proposition and is willing to pay for it. This collaboration between company and customer is the foundation for ongoing success. 'The customer is always right' is wrong. 'The profitable customer is always right' should be the new mantra for the forward-thinking business professional.

Lior Arussy is the president of Strativity Group a global customer experience research and consulting firm. He is the author of Customer Experience Strategy - The Complete Guide from Innovation to Execution.

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