We all love discounts, right? Who doesn’t love a deal? If we can get something for cheaper, we’re going to find a way. That’s why if you ask anyone if they like discounts, they’ll say, “I love them!”
But you might be forgetting the times where you’ve gotten burned by discounts. Do you remember the last time you bought something at full price only to see the seller discount it shortly after that? How did that make you feel? Likely duped—as if you weren’t smart enough to figure out you should have waited. Nobody likes feeling ignorant or taken advantage of, yet this is the experience created by a product owner for their loyal customers when the cost of a product or service is discounted.
Why do people discount then? Let’s run through a scenario. You launch a product, you make some sales, and then sales die down. You’re sad because you’re not making sales and you start to get desperate. What if nobody buys, and what if I don’t make any more sales? To make some quick money, you discount your product. You wait until the nearest holiday and slap a sticker on everything: Holiday Discount!
Everyone cheers. Lower prices! Cheap products! Great deals! More money for you and everyone wins! Except for one person: the loyal buyer.
The loyal buyer purchased at full price and bought as soon as the product was available. The greatest mistake you can make is forgetting your loyal buyers. They are the lifeblood of your business, and they are the people who will potentially buy the most from you. Discounts punish loyal buyers. Discounts tell your loyal customers that they were stupid to buy early. Had they waited, they could have gotten a discount and a better deal.
The true value of a product is the least amount you’re willing to sell it for. Because you discounted, your loyal customers didn’t buy at full price; they bought at an inflated price. The true value of your product was the least amount you sold it for. The discounted amount is the true value.
When you discount, you devalue. People discount their products because they get desperate and want to make quick money, but discounts have long-term ramifications: you’re training your customers not to purchase new things from you when they first come out.
When you’ve established that you will discount your prices, people know there will always be a lower price at some point in the future. You’ve communicated that they would be a fool to buy from you early; they should know you’ll eventually get desperate enough to lower the price to make sales later. You’re training your customers to wait for a discount. They will never buy from you at full price anymore because you’ve already set the true value of your products. You’ve locked yourself into a devaluation trap.
The reason people discount is that they think people won’t buy otherwise, but people pay full price all the time for certain kinds of brands. There are two kinds of brands:
- Discount Brands
- Premium Brands
You can be only one of them.
You’re either heading toward the discount bin or you’re increasing the value for your customers—you don’t get to straddle the line. Your business decisions are taking your company in one direction or the other. Business owners get desperate and think their customers won’t buy without discounts (if you’ve trained them this way, that’s absolutely true). If you decide to change things, you need to understand that the damage has already been done: you’ve attracted a certain kind of person and established a cheap customer base. If you intend to make a change, expect to lose those people, not convert them. The only way out is to rebuild your reputation and brand and attract new customers.
The strange thing is that all of us buy both discounted products and premium products. It’s not that some people only buy premium products and others buy discounted products—we all give our money to both kinds of brands. Customers who primarily buy premium products will still take advantage of deals and discounts. Even those who appreciate quality will take a cheaper price if it exists. People aren’t stupid.
Business owners fail to understand that it all comes down to positioning. There are certain brands we all know will never discount their rates. The wealthiest companies in the world don’t devalue their products. They don’t discount and yet we all still buy their products without discounts. Why? Because of brand perception.
When a brand never discounts, we don’t expect discounts from them and we buy at full price. Does that mean we never buy products from discount brands? No, of course we do. This is extremely important to understand: we buy from discount brands so we can save money to give to premium brands. Premium brands enjoy high profit margins because they never discount and don’t resort to discounts to incentivize sales. They can charge ten times what the discount brands do and their customers will pay it because they have a premium perception.
The same exact customer who scrounges around for coupons to save money on your discounted products turns around and spends every dollar they save on a full-price item from a premium brand.
Give It Away or Charge a Premium
The only two prices that acknowledge full value are full price and free. With full price, it’s obvious: someone who purchases something at the full amount will value it at the full amount. A buyer who purchases a discounted product doesn’t value it at the original price; they value it at the discounted amount because the true value of a product is the least amount someone is willing to sell it for.
Full price or free. Either give it away or charge a premium.
Premium brands never discount their products. They never lower their prices. If anything, they increase their prices. Why do we still buy from them? Because we know they’re not going to discount. We look at the price and say, “Oh, I guess that’s the price. That’s what I’m going to have to pay if I want this. I guess I’m going to need to go save.”
So where do we save money? Where do we find the extra money to give to the premium brands? We save money on the discount brands. When you discount, you put your customer in a deal-seeking mindset where they will try to find coupons to save money. They’re now focused on keeping expenses down. When we’re in a deal-seeking mindset, we see things in terms of expenses—we’re in a saving and preservation mode. Products that are not discounted force us to think in terms of investments, and products that are discounted force us to think in terms of expenses. Expenses are what we want to keep down; investments are what we want to maximize. When we want something of quality, we’ll gather up all the money we’ve saved from the discount brands and give it to a premium brand. Is it any wonder why premium brands make more money?
Which do you want to be? Do you want to be a discount brand, or do you want to be a premium brand? You can’t be both. The only way to win as a discount brand is to fully embrace your status as a discount brand. Go all out. It’s possible to become a billion-dollar company by going all out on discounts at an extremely high volume, but you have to fully embrace your status as a discount brand.
Failure or frustration are sure to occur when you think you’re a premium brand and yet run discounts: all you’re doing is actively devaluing your brand. You attempt to position yourself as premium, yet your discounts anchor you to mediocrity. Because you won’t go all out on discounts, you also won’t succeed as a discount brand. You can’t win either game when you straddle the middle; you can truly succeed only by embracing either direction.
If you aren’t willing to fully embrace your status as a discount brand, don’t run discounts—at all. Premium brands do not devalue their products, and that’s why they will always make more money.
When you embrace your status as a premium brand, you’ll become more profitable and have better customers, you’ll be able to make better products, and you’ll have extreme loyalty with those customers because you never have to discount to get their attention. You can now launch a product and people will line up to buy it because they know the price of the product will never be lower in the future.
Honor Loyal Customers with Introductory Pricing
It’s important to note the difference between a discount and an introductory price. The people who buy from you early are your most loyal customers, and you always want to reward customer loyalty. Discounts punish loyalty and are a slap in the face to anyone who’s previously bought from you. If someone buys from you early, they should get the best price because you want to make your customers feel smart. The people who buy early should be rewarded for their loyalty.
One way to reward loyalty is by debuting a product at an introductory price. Later on, you can increase the price, but every price increase must always be permanent. A discount punishes early buyers while a permanent price increase rewards early buyers. As long as you create products that provide many times more value than the price, you will have enough headroom to increase the price. Discounts devalue, but permanent price increases reward early buyers.
Charge Full Price or Free for Client Work Too
While much of this chapter has been focused on products, the Full Price or Free mantra applies to client work just the same. When you charge full price, the client feels like they’re getting a full-priced value. When you discount that rate, it devalues the worth of your work. If you tell the client the project is going to cost $2,000 and the client says, “Oh, I only have a thousand dollars,” what should you do? What a lot of business owners do is say, “Well, I guess I can come down in price just this once,” or, “Okay, I suppose I’ll take the project—I just might have to make it a lower priority.” What you’ve just done is devalued your work.
Never discount your prices. The amount you quote is the price. Never bring it down arbitrarily. If you quote $2,000 and the client says they have only $1,000, you say, “OK, I’ll see you when you save up another thousand dollars!” You came up with the original price for a reason.
The only reason to lower the price is if you’ll do less work. What you can do is remove features so long as it does not compromise the final product. For instance, if you’re building a house, you could offer to remove decorative window frames from the proposal, but it would not be acceptable to offer to build the house without a foundation. While that would save the client a tremendous amount of money, it would compromise the structural integrity of the house and that would reflect poorly on your craftsmanship.
Discounts are very tempting, especially when you’re in a scarcity mindset. It’s one of the most dangerous aspects of a scarcity mindset. When you devalue your services, you end up feeling under-compensated. Even though you may be doing work you otherwise enjoy, it will be in less-than-ideal circumstances. The more you compromise, the greater chance you will kill your passion. You deserve to be well-compensated for your work and the value you create.
Protect your ability to say “No” by preventing a scarcity mindset with a day job. As you begin overlapping from your day job to pursue your passion and do client work, prioritize building up cash reserves so you’ll have financial padding. When you have six months of expenses saved in the bank, you won’t be desperate. You won’t be inclined to decrease your price and devalue yourself just to get the job.
Stick to your guns and charge full price or free—nothing in between. Never discount your services. Discounts always devalue.
- Discounts punish loyal buyers. Discounts tell your loyal customers that they were stupid to buy early.
- The true value of a product is the least amount you’re willing to sell it for.
- When you’ve established that you will discount your prices, people know there will always be a lower price at some point in the future. You’re training your customers to wait for a discount.
- There are only two prices that acknowledge full value: full price and free.