Unless your product is a “perishable” product like a hotel room, airline seat, or bananas, discounting for the purpose of generating revenue without adequate profits is a bad idea.
If your product or service has a perishable life then it may be a candidate for using discounting strategies. I am not talking about selling bananas but they certainly are a kind of product that suits itself to this strategy. I am really talking about products like airline tickets, hotel rooms, rental cars, and other products where the business has a pretty high fixed cost and low variable costs to provide.
Certainly hotel rooms qualify because the costs of a hotel mortgage are quite high (fixed costs) and the variable costs of the running the hotel is low in comparison. When a hotel is located in a high demand area it makes a great deal of sense to discount in the week or so prior to the expiration date of the potential booking. The time when it would not be a good strategy is during a period when occupancy is expected to be near capacity, like during a weekend festival when many out of town visitors will be renting hotel rooms.
Companies like Hotels.com make sense because they aggregate deals for cities you may travel and need to stay at a hotel. The catch is you have to pay in advance, so if your trip is cancelled for some reason, the amount of money you spend (less Hotels.com commission) is nearly pure profit for the hotel and helps a hotel owner get to and pass its break-even point.
Recently I discovered a website that shows one deeply discounted product or service for the day for a given community. www.livingsocial.com is a simple website that lists one “deal” per day in 16 U.S. cities. It gets the word out via a daily email. On the day I looked at the advertised specials on Living Social’s websites around the country I found a 50% coupon for a rock climbing gym, 50% off Brazilian bikini wax services (ouch!), 55% off a session of bowling, and 52% discount off of home maid service. Each of these discounts features a service that has a high fixed cost model and a low variable cost component.
For these companies that have high fixed costs and low variable cost, discounting may make sense to promote your company or service. With a service like Living Social, they may sell quite a few pre-paid services which do help cash flow and potentially increase customer awareness of the company having the promotion.
Since Living Social shows how many people purchased a specific deal during the day it was offered, I looked at one deal where the average price paid was $90 for a popular $180 normal price, I calculated that the merchant promoting their service brought in real cash of about $135,000 in the deal. The pre-paid service offer expires on December 31, 2010 and it is likely that there will be quite a few unused services at the end of the year. For this merchant that has a seasonal business, the strategy is perfect.
With the use of the Internet and social media, certain kinds of companies like I have described have a perfect opportunity to integrate a discounting promotional strategy into their overall business model.