Why Discounting Hurts Your Business More Than It Helps

As a pricing strategy consultant, I often see new clients want to dive into the deep end of the pool and discuss operational price settings, i.e. cost plus method of pricing with a markup on cost of goods sold or competitive pricing which is the simplest approach but often to race to the bottom in a price war. The real opportunity lies in value-based pricing (VBP) by quantifying the perceived value of the customer, the small business owner could command the highest premium in terms of margin and profitability. VBP is often the most challenging as it demands the most time and energy to build a strong value proposition.

Building this value proposition followed by great sales and marketing execution is a transformative journey. It is extremely rewarding when you get right but it can turn to a potential disappointment when your leadership and team crack under pressure on the pitch and uses discounts as the first tool for reengagement. Understanding one's value proposition is the first step is worth the effort which I'll highlight this in a story.

In a rural Washington town, a local Ukranian bakery noted for its ethnic desserts and baked goods often undercharged to compete with American bakeries. As result, they would only invest in a handful of time-consuming recipes because a cost-plus pricing mindset pushed them out of the range of specialty items.

Medovik, an exquisite honey cake, was an exception. The aroma of butter, honey and vanilla was unmistakable with a slight sweetness that hinted at its Eastern European origins. Over the years this particular area has been a magnet for Eastern European seeking a better life and the American dream. The owners were paying homage to distance recipes made with the same thoughtfulness but at affordable prices. It was a unique offering for the neighborhood, and the owners took pride in their craft. As more transplants arrived, the bakery's reputation grew, but they still faced challenges with competing "American" bakeries.

As more Eastern Europeans moved in, requests for specialty cakes to honor special celebrations and holidays (like New Year's!) increased. The owner's faced a dilemma, honor their cultural traditions and provide an authentic experience or keep prices low to compete.

Medovik involves layers upon layers of thin sponge cake, with cream filing covered with honey and smetana. Constructing these delicate layers of cake and stack them delicately requires enormous patience and skill. The cake also has to sit and chill for a day for the cake to absorb the cream filling to allow the flavors and texture to develop. The end result is a dessert that has the consistency of cheesecake but with the complexity of the impressive number of layers revealed with the first slice.

The owners struggled with the worry that their customers, who had grown up without the means for such indulgences, would balk at the true cost of producing this labor-intensive specialty item. When they first arrived in the US, they had prioritized affordability over all else.

It took their good friend's celebration with other Eastern Europeans community members for the owners to realize their assumptions were misguided. These potential customers didn't want just dessert, they want a connection to their cultural heritage. The bakery wasn't selling dessert it was selling culture, tradition and family from an ocean away. The owners came to realize that they should not be ashamed about charging a fair price and by discounting their product to be competitive with the American counterpart, lost an opportunity to capture the joy and establish the worth of their craft with a built-in audience that would have paid whatever it took within reason to bring a little bit of home.

At first, the American customers didn't fully understand grasp the effort that went into making something like Medovik. But the Eastern European patrons did, and they saw setting a commensurate price as a matter of respecting the time and care the owners poured into their work. The owners realized that if they weren't making a profit, they wouldn't be in business for long. The reputation for authenticity has since attracted customers who see the bakery's offerings as a unique experience, not just a commodity to be price-shopped.

Whether its discounting or not calculating one's real value, such actions undermine the contributions a business owner brings to the market. We become myopic, failing to see the big picture of the value you bring and the joy you can create.

As an alternative, sellers should ask their buyers, the "why" behind their objections. It could be that customers want flexibility and optionality. This conversation on the economics of the transaction often comes too late in the sales process. This is often uncomfortable because often at this stage the seller is already attached to the deal. Offering pay-over-time can help maintain the premium pricing and offer time as currency, to avoiding the need to resort to discounting.