The Temptation and Risk of Discounting in a Covid-19 World
by Scott Sanders, President, Integrated Insight
Published September 3, 2020
As businesses reopen, many are grappling with the need to discount to generate demand. While it may seem like the right thing to do, will discounting really help generate profitable demand?
The tourism industry has been impacted significantly by the current pandemic. Companies are gathering insights to understand how individual consumers and families have been impacted, and specifically, when consumers will begin to travel again. Published research reveals some interesting insights.
- COVID-19 is the number one barrier to travel. Health and safety is critical to getting consumers traveling again.
- Price, often a top barrier in leisure experiences, has fallen much lower in the rank order. As a result, lowering price alone is not likely to get consumers back in the game.
- Most consumers have been impacted by the pandemic and expect to spend less on out-of-home entertainment this year.
As consumers adopt new spending habits, organizations need to evaluate their pricing strategies. Promotions can be a great way to generate new customers and drive growth. However, discounting tends to be a short-term solution. You’ve heard the old adage, “too much of a good thing can hurt you.”
The same holds true for discounts, if not done correctly. Frequent discounting can have unwanted consequences, such as devaluing your product or degrading price integrity. And once consumers are trained to wait for the next offer, frequent discounting will erode base profits.
Before deciding whether to implement discounts, ensure your company has created a holistic pricing strategy. If your organization doesn’t have a holistic pricing strategy, now is the time to craft one. Learn more in our article: How to Develop a Successful Pricing Strategy.
Discounts and promotions have a key role to play in every organization’s pricing toolbox and strategy. Effective promotions typically deliver on all of the following:
- Lend themselves to compelling marketing messages.
- Target specific audiences and time periods.
- Are fenced to avoid dilution.
- Have a strong sense of urgency.
- Can be yield managed.
When evaluating discounts especially in today’s environment, consider offers that encourage higher than average spend in lieu of discounting core products. Also ensure sufficient marketing and sales budget is available to create demand for the offer and focus on communicating value over price. Leverage the pricing structure to pull consumers into higher yielding products.
It is also critical to measure promotions to determine if they deliver on established goals. Do the math to understand cost versus benefit and develop a “test and adjust” culture to continue building on what works.
Let’s look at a couple of recent promotional offers and contrast differences.
Universal Orlando Resort just released a Florida Resident offer to increase in-market demand: “Buy a Day, Visit Every Day Thru Dec. 24 For Free.”
Rather than discounting the base 1-day 1-park ticket, the offer is providing a buy-up opportunity. If guests upgrade to a 1-day 2-park ticket, they can receive admission for the rest of the year for free.
The promotion is set up for success for several reasons.
- It is fenced to Florida Residents.
- It offers value and has a strong marketing message.
- The finite booking window creates a sense of urgency to purchase.
- It is structured to avoid dilution of the base business.
- It has a clear usage window.
- Revenue improvement doesn’t rely on incremental sales.
- It incentivizes repeat visits and in turn increases in-park spending.
Now let’s look at a different kind of offer: a single day discount offer. A good example is a recent offer by a regional amusement park for a 1-day discount in collaboration with Coca-Cola: “Buy your tickets here and save up to $30.”
This promotion is structured to attract visitors with a deep discount message on the core single day ticket. Rather than speaking to a specific market, the offer is available to anyone online.
This offer might be compelling, but it carries a higher risk than the previous offer because it:
- Devalues the core ticket product.
- Is available to anyone who buys online versus a specific audience.
- Relies on driving incremental sales to be successful.
- Has no booking window or usage window to create urgency.
Both of these offers could generate value, but each carries risk. When compared, the buy up offer carries less risk than the discounted single day offer because it drives positive revenue improvement with minimal buy up and no incremental demand, even after accounting for buy down from higher yielding tickets.
Let’s compare the two with a couple hypothetical scenarios.
The goal of the buy up offer is to pull visitors up the price curve by providing the opportunity to visit multiple days for the price of a 1-day 2-park ticket. We can assume some modest buy up from the 1-day 1-park ticket ($119) to the 1-day 2-park ticket ($164) and slight buy down from the 2 day 2-park ticket ($223). In addition, there will likely be no volume loss since the core ticket price hasn’t increased. This promotion does not require incremental sales volume to drive revenue improvement or break even, which reduces risk.
The “$30 off” offer is designed to drive incremental attendance by discounting the base single-day ticket. Because the offer discounts the base ticket, some individuals who would have paid full price are now able to pay less. We refer to this buy-down behavior as dilution. Because of the dilution in the base ticket price, a 10% increase in visitors is needed for the offer to break even. Broad offers like this can be risky, especially when park capacity is limited.
Learn more about our guiding promotion principles to help you understand whether discounting will work best to increase demand while preventing downside risk.
While these are unprecedented and trying times, now is the time rethink pricing and come out stronger on the other side. Below are some closing recommendations for discounting in today’s world.
Keep the customer front and center.
Play your own game.
- Have confidence in your product or service.
- Lead; don’t follow
- Don’t assume your competition is right.
Develop different playbooks for specific segments or markets.
- Not all customers are created equal.
- Individual wants and needs are different.
- Plan potential promotions months in advance.
Establish a test and adjust culture and build on what works.
- Do the math to understand cost benefit.
- Measure, measure, and then measure.
Lastly, make "Pricing" a core competency in your organization.
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