Friday, October 9, 2015

Problems with Discount, Rebates, Lower Prices

Recently, Harvard Business Review pointed out that telecom customers who are at risk of defecting to a competitor are more likely to defect after being offered a lower price plan. I understand this. One of the lessons I learned from a former boss was that if you could 'suddenly' reduce your price, it wouldn't take the customer--in any industry--long to figure out that you were overcharging, gouging, taking advantage...of them before.

Same thing happens with instant rebates, discounts, etc. Pretty soon customers figure out that you're making healthy margins if you can offer sale prices, discounts, rebates, etc. So they just wait until you're inventory is burning up and you need to move it quickly. I wait until subscription magazines are so desperate to keep "little ol' me" in their circulation numbers that they offer their rock-bottom renewal rate. The researchers in the article speculated on two other reasons why people switch after being offered lower prices: they're now aware lower prices are available in the market place, overcoming their inertia of not looking and sticking with what they know; they're now aware that they were overspending (in data usage, for example) and realize they need to find ways to reduce costs (usage, fashion, functionality, seek equivalent quality elsewhere, etc.).

If you only compete in the price dimension, you and your competitors will slide downward. My Haitian businesses have learned this lesson too. They competed only on price even when they offered higher quality goods. They almost always offered discounts and now the customers expected them. They have a challenge in selling the value of their goods and services. But they have to beware also: If you let people know they've spent too much (bought more than they need, etc.), they're not going to reward you either.
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