Dark Side of the Discount: How Deals Can Undermine Customer Relationships

Businesses love customers. Customers love discounts. And so it seems intuitive that businesses who make effective use of discounts will improve their relationships with customers.

Unfortunately for those seeking a customer management shortcut, the "effective use" clarification needs to be taken firmly to heart. While discounting can serve as a valuable means of attracting and retaining customers, if not done correctly, it can thoroughly undermine a brand’s position with customers and actually devalue the overall experience.

In this article, we look at some common discount objectives and identify why many brands, believing they are strengthening customer relationships, actually risk undercutting their own value propositions.

Creating "Urgency" and "Fear of Loss"
The Premise: By establishing a sense of urgency and/or fear of loss in the transaction process, the company significantly improves the likelihood of "closing" a contemplative customer. Discounts, by virtue of carrying an expiration date, put forth the notion that a customer will miss out on a valuable opportunity if he does not take advantage of the offer in the immediate term and thus create that valuable sense of urgency.

The Challenge: Think of your last negotiation with an inexperienced used car salesman or door-to-door peddler. Though that individual was trained to develop a "fear of loss," you saw right through his shtick and knew he, at the end of the day, was not truly indifferent to the sale (he needs the commission!) and would thus not simply walk away from the prospective deal. As a result, you maintained at least a degree of leverage in the negotiation process.

The second "fear of loss" can be exposed as a mere tactic on the part of the merchant is the second it becomes meaningless. If the customer does not truly believe you would rather turn away his business than extend a great deal beyond the expiration date, you will not achieve the desired urgency.

Discounters, too often, make the mistake of hollowing their own urgency message. They cycle through "deals" as if it they are obliged to do so, letting customers know that even if they miss out on the current deal, something just as good—if not better—will emerge in the near future. As a result, customers feel a limited compulsion to "act now or forever regret."

A popular retail chain exemplifies this practice. Sometimes, it offers a "buy one item, get two free deal." Sometimes, it offers "40% off the first item, 50% off the second item, 60% off the third item." Sometimes, it promotes "buy one item, get a bunch of accessories free." Sure, some deals are better than others, but the point is that if there is always some valuable deal, the customer has less reason to purchase out of fear that he will miss out on one.

Far too many businesses condition customers to view discounts as "expectations" rather than "opportunities."

Attracting New Customers
The Premise: When it comes to trying new things, customers are somewhat risk averse and question whether an unfamiliar brand’s goods or services will live up to the promised expectations. By providing a discount, brands remove some of the risk and facilitate customer "sampling" of the unfamiliar product. Once customers are in the door, they will be able to confirm the product’s value and become regular customers.

The Challenge: Call it "Groupon syndrome." When relying on discounts to attract new customers, many companies go overboard and significantly lower the price point for the relevant product. As a result, these organizations are valuing their products at unsustainable levels and thus fail to build a contingent of repeat buyers willing to purchase items at the "list" price point.

Even worse, if the discount is especially compelling, it broadens the market message and attracts those prospective customers who are not of high-priority or value for the organization. In such situations, the discount is seen as an event ("sure, I’ll spend $20 on Saturday night dinner for four") rather than an introduction ("I’ve always been curious about that Italian restaurant around the corner—now I have a reason to try it and maybe become a regular customer").

Tempting customers to walk through the door is fine—smart, in fact—but the temptation should not be so great that the inherent appeal of the product becomes meaningless in the transaction.

Adding Value to the Customer Experience
The Premise: In order to keep regular customers engaged (and to create a better impression for new customers), many establishments promote in-store "specials" on certain products. In theory, this can improve customer loyalty ("This restaurant isfighting to continually improve my experience, a sign that it truly cares"), expose customers to new products that will increase the size of their average "basket" when they shop ("Until getting the deal, I hadn’t realized how great the side orders were—now I always order fries with my burger") and increase frequency of purchasing ("I used to come once a week; now, I come every day because the various specials assure variety").

The Challenge: One of the drawbacks of in-store "specials"—and a broad consequence of discounts in general—is how they transform perception of product value.

Prior to encountering daily specials, regular customers demonstrated complete acceptance of the list price—they were willing to spend that price, regularly, with no further enticement necessary.

But people do not turn down attractive discounts, and so the second in-store, daily specials are made available, customers are going to take notice. And if the special discounts apply to items the customers would have regularly consumed anyway, they suddenly alter the value picture. Now, instead of gladly paying $9 for that awesome sandwich, I know there is a chance I will only have to pay $6.

If the specials are provided with enough frequency, I will soon find myself accustomed to the $6 price and question whether it is ever worth paying the full price.

As a result, I will be more inclined to purchase whatever items are on "special," thereby lowering the profit margin for the business. Worse, if an item I want is not part of a daily special on a given day, I might avoid shopping there altogether.

This situation, the very impetus for writing this article, is not hypothetical—it refers to a real experience that has actually greatly limited the frequency at which I get lunch from my favorite restaurant in the area.

Make no mistake—discounts can indeed be used to generate customer loyalty. But they should be offered either to promote the expansion of one’s purchase (ie, using a discount to encourage customers to buy a milkshake with their sandwiches) or to drive higher-frequency purchasing (ie, rewards cards). If they apply to items perceived by customers as the main source of value, they will undermine that value and risk reducing a customer’s interest in spending money with the organization.