Year-end discounts are like heroin – they are highly addictive, and they have many negative side effects. I am specifically referring to the practice of abandoning your pricing strategy and increasing discounts in December in order to boost sales and reach certain targets. Once a company starts those discounts, the selling company and their customers get used to them. The customers, like a body craving heroin, start to demand those discounts, and that often results in simply delaying sales from earlier periods to year-end or accelerating sales from the next year, but at lower margins. The selling company wants those year-end sales and finds it too hard to resist giving discounts to generate the sales. The heroin and the extra discounts are both habits that are best avoided, but if you are already addicted, what options do you have to kick the habit?
I’m not an expert in treating drug addiction, but there are 3 treatment approaches often mentioned: 1) quitting cold turkey, 2) tapering, or 3) substituting something less harmful like methadone. Quitting cold turkey is straight forward, you simply decide you are going to give up the discounting (heroin) and suffer the unpleasant consequences. For a business quitting year-end discounting, that could mean a lower stock price from missing targets, reduced or no executive bonuses, and reduced or no sales commissions. Those all could be painful. If you are going to quit cold turkey, remember you most likely got in this situation in an attempt to hit certain targets. So communicate early too your customers, sales team, board and investors that year-end discounting has long-term consequences and you intend to suffer through near-term pain to stop. It will still be painful, but telling everyone what you are going to do, being consistent, and working hard to restore confidence when the withdrawal ends can help you survive it.
Tapering is a process of gradually weaning the body off heroin. It does not avoid the effects of withdrawal, but tapering spreads the pain and discomfort out over a longer period, so they are more manageable. For the year-end discounter that means gradually reducing the size of discounts offered to induce sales. If you plan to taper, you will need to have courage to stick to the discounting limits you set in your tapering plan. The fear of not hitting targets that led you to discounts in the first place will still be there, so the quicker you try to taper, the greater the risk of failure. Taper gradually in the first year to build confidence. Reiterate and reinforce your value proposition with your sales reps and customers, and target your least price-sensitive customers for sales of additional products and services.
The last option is the methadone program. Heroin addicts substitute methadone because it offers many of the pain-killing effects of heroin, but has fewer of the painful withdrawal effects. For businesses addicted to year-end discounting, there may not be anything directly analogous to methadone, but there are options. The point is to generate the sales boost you were seeking without the harmful longer term consequences of discounting. Consider discounting only your slow-moving excess inventory, those items soon to be replaced at the end of their life cycle, or obsolete inventory. In that way, you avoid setting new reference prices that will bite you in the future. Another option is to offer the discounts on product or service bundles, so the discounts are for buying multiple products, including some that otherwise probably would not have been purchased. Another variation is to offer the discounts on the year-end products in the form of a credit that must be used in the first quarter. In all of these variations, you are still offering additional value at year-end, but you are also reducing the longer-term effects of lowering price expectations or pulling future sales forward.
Discounting prices at year end in order to hit targets is more common than heroin addiction and is certainly less lethal, however both habits are pernicious. If you are addicted to year-end discounting, breaking that addiction will be beneficial to you over time. It will not be easy, but kicking the habit can preserve your pricing strategies and integrity.
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