Should you offer online discounts?

This week I was interviewed by a journalist who was trying to find out my views on the increasing trend for stores online to offer the cheapest possible prices. And the day after I did the interview, I was asked by a client about the different levels of discount they "should be offering". In both cases I pointed out that discounting is a mug's game.

The journalist asked me about the pressures supermarkets face with the discount chain stores, such as Aldi and Lidl, expanding in the UK. Not only that, there are increasing numbers of "pound stores" all making life tough for the supermarkets. But the supermarkets only have themselves to blame.

Consider what their advertising is about. Whether it is Tesco, Sainsbury or Asda, they all focus on price and how their goods are cheaper than the other stores.

This is a psychological dead end.

It is called "priming" and it sets the framework for thinking.

People do not go into supermarkets and think "I am so glad this is high quality produce" or "I love the trouble they go to with their displays". Instead, the mind of the supermarket shopper is firmly fixed into "is this the lowest price available?" And that is because it is the main thing the supermarkets talk about. The more they talk about price, the more our minds are fixed on discounts and low costs. It means there is only one direction the supermarkets can head in - tighter margins, internal cost controls, pressure on suppliers, reduced ranges and everything else that helps them derive profit from low prices.

Consider, buying a car. Most cars are the same - they get you from one place to the next. The differences are largely in performance and the luxury of the interior. Considering there are speed limits, which all cars are capable of exceeding and that the luxury of the interior is merely cosmetic, there's not really a lot of difference between a 1 litre run-around and a gas-guzzling supercar. Except price. And guess what those manufacturers of the 1 litre run-arounds do? They focus the mind of their customers on price and thereby also have to give discounts. Just try getting a discount on a supercar. Most customers don't even ask the price because their mind has been primed to focus on other factors.

When you prime the mind of your customer on price, they start to want to lower that price, leading you inevitably to have to offer discounts.

The reverse of this issue, of course, is all the evidence that discounts work. Offer a discount and people buy. We all love a bargain.

*But the question is, should you be the business offering the bargain? *

Imagine you have a product that sells for £100 which costs you £40 to produce. That's a nice, healthy 60% margin. But what if you offered a discount, setting the price at £80. You have reduced your profitability to 50% - at the same time as triggering people into believing they can get an even lower price. Not only that, because you have primed them into thinking about price, off they go around the Internet seeing if they can buy something similar elsewhere at an even lower price. Not only do you reduce your profitability, you also potentially lose sales. It is the supermarket scenario all over again.

My advice? Don't offer discounts, but focus on a really powerful psychological factor which is scarcity.

When things are in low supply people want them, almost regardless of price. There are very few Lamborghini's made, but millions of Fords. Controlling the supply of those Fords and making the colours scarce, or the particular features scarce, is much more helpful to profit margins than selling loads and loads of them at knock down prices. Besides which, when you provide discounts you attract discount hunters - people who selling repeatedly to is much harder. Full price payers are more amenable to up-sells and additional sales at a later date.

WHAT I LEARNED THIS WEEK - Do not make assumptions

The other day I was walking round to the little local village railway station just around the corner from where I live. It has no staff and no ticket machines. There is usually a ticket collector on the train who has a machine and sells us tickets. If they are not there, then there is a ticket office inside Reading Station where you can buy tickets if you have boarded a local service without being able to pay.

However, our local station car park, which was always free to park in, has been taken over by a major car parking firm. The station car park holds about 20 cars and was always full with commuters' cars in its free days. But since APCOA have taken over the car park from Network Rail and started to charge people the car park is largely empty (though unsurprisingly our local streets are full...!).

In an attempt to lure people in, you can now park there free for 45 minutes (useless when we only have trains once an hour). And, probably in an attempt to reduce costs the car park now has no "pay and display" ticket machine. Instead everyone staying longer than 45 minutes must register and pay online or on their mobile phone.

This really flummoxed the couple I met as I walked to the station the other day. There was only a minute to go, before the train arrived. They had expected to be able to pay for their ticket by cash. They were not trying to evade payment, they wanted to pay for their car parking. But APCOA had assumed that people would arrive in enough time to make a phone call, or go online using their mobile phone.

They even assumed that people would have a mobile phone with them - I still know people without such devices. The poor couple were still trying to get through on the phone as the train arrived and still had not been able to pay by the time we got to the next station. It might be efficient and low cost for APCOA, but there seem to be too many assumptions built into their system. It just reminded me that making assumptions generally leads to problems.