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Reducing the (Perceived) Price with Coupons, Rebates & Discounts

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Cutting book prices can increase sales, but it could also encourage
competitors to follow your lead, starting a price war. If you advertise your
books at one price point and then cut prices, some past customers will
suspect that they’ve been gouged. Value, not price, convinces a buyer.
Customers want quality, but at a cheap price. This forces you to walk a”value-quality-efficiency” tightrope. Pricing requires special skills and a
mindset that can relate clearly to the customer.

IBM and Compaq drastically cut PC prices in the summer of 1991. Normally,
during a sluggish economy, price cuts stir increased sales. However, the cuts
by IBM and Compaq were not enough to stimulate demand in a recession. Sales
remained relatively flat, and conservative buyers purchased clone computers,
believing that clones offered a better deal (perception). As sales stagnated,
these two computer giants suffered huge revenue losses.

Setting your price below costs just to move your products or to “build or
regain market share” may be foolhardy. You’ll attract “el cheapo” bargain
hunters. And when you must later raise your prices to make a profit, you may
not find new customers willing to paying the higher price. Everybody loses
except the low-price bargain buyers.

Don’t target “customers” who aren’t willing to pay enough for your product.
Let them go, and focus on buyers who appreciate value and are willing to pay
for the products that you work so hard to produce.

Price-cutting can increase sales and be effective during promotions, markdown
sales, and to reinforce your company’s positi/iman the industry. But approach
pricing carefully and keep profit in the formula. A publisher with excess
inventory typically considers price-cutting to increase the turnover rate.
This occurs openly, or is disguised as discounting.

“Across the board” price-cutting is not wise. In this approach, the listed
price for every product is reduced by a fixed percentage. The owner uses
guesswork rather than surgically-precise cost analysis in setting price.

Cost analysis is not a discretionary activity. It’s critical. You must know
the exact cost for each product that you sell. Improperly calculating your
cost factors can drive you into liquidation or bankruptcy.

Never reduce prices across the board. When you do cut prices, cut them
carefully, cut them selectively, and know the effect each action will have on
breakeven. Some books will sell well without special offers; others titles
will need lower prices to move product. A smart approach may be to offer
discount coupons and rebates on selected products.

The Lure of Coupons

Recently I walked down the main street in Lahaina, Hawaii. As I passed a
certain gift shop, a salesperson stepped out from the doorway and handed me a
“10% Off” coupon.

“Everything in the store is 10% off today,” he said. “And this is on top of
the sale that we’ve been running all week.”

Hawaii was in an economic downturn. Customers weren’t spending freely. And
shop owners were doing all they could to encourage people to spend.

The concept of using coupons to attract business has been around a long
time–particularly in the food and electronic products industries. Coupons
are the reason some people buy newspapers on Thursday or Sunday. Coupons are
also why people purchase one product and not another.

One of my friends owns a strip mall shopping center and operates several
retail stores. He told me once that his best advertising tactic is to mass
mail a coupon book to his local community. He tried flyers, display ads, and
many other advertising media, but the coupon booklet works best for him.

His 16-page, saddle-stitched booklet is about 3.3″ high and 8.5″ wide. He
puts one or two products on each page. For his particular retail business,
women are his best customers. They carry his coupon book in their purse. They
carry it in their car. And they buy what he advertises.

A recent article in the Wall Street Journal described a university study to
determine the effect coupons have on consumers. Researchers at three
universities found that of the 310 billion coupons distributed in the US
annually, only 7.7 billion were actually redeemed–a mere 2.5%. But even
though most (97.5%) go in the trash, coupons still influence what people buy.

The study revealed that coupons affect sales more than redemption rates
indicate. It turns out that when consumers see coupons, even the non-coupon
clippers are more likely to buy a coupon-advertised brand product than one
not advertised in a coupon. In fact, purchases of a product advertised by
coupon are just as strong with non-coupon users as they are with those who do
redeem coupons. So just distributing a coupon offer can boost sales.

These researchers also reported that people looking for specific coupons are
affected by the messages conveyed by other non-related coupons. Incremental
sales by non-coupon buyers increase just by their seeing the coupons. This
offsets the reduced profit margin caused by the coupon-redeeming customers.

Coupons work in retail stores. They work in publishing too. What if you
offered a 10% discount during a “Get To Know Us” sale? The idea is to attract
prospective buyers. What if you gave a free copy of a special book if a
customer returns your coupon with an order for any other book in your
inventory? Few publishers currently use the coupon approach. Perhaps they
should.

Rebates Offered Vs. Rebates Collected

Another tactic is the rebate. Rebates are common in automobile,
telecommunication, and video tape feature film sales. Why do these vendors
offer rebates instead of just lowering their prices?

The strategy behind rebates is that sellers want prospects to be attracted by
the lower price (money back) but be repelled by the bother of collecting.
Actually, many people end up not asking for a rebate when the rebate was what
psychologically pushed them into buying.

Marketing companies who study consumer preferences say that “prospect theory”
drives rebate strategies. Thomas T. Nagle, of the Strategic Pricing Group in
Boston, was recently quoted in Fortune Magazine regarding the concept of
rebates. “People judge the loss of any given amount as more painful than they
judge the gain of an equal amount as pleasurable.”

What sounds complex is simply that people view spending a few more bucks as
less painful if they have an opportunity to get some of their expense back.
This psychology pushes prospects into jumping on rebate deals. They view the
rebate as a reduction in pain when buying.

Yet, according to prospect theory, once they make the purchase, the actual
rebate becomes less important. After purchasing, the rebate feels like a
small gain for the time and effort it takes to collect. Thus they
procrastinate and many don’t bother. A $5 rebate offer on a $14.95 product
looks good and causes people to buy. But taking the time to fill out and send
in a $5 rebate form just doesn’t seem worth the effort. Many don’t feel the
time is justified for only a $5 gain. And many procrastinate past the date
printed on the rebate form.

Rebate deals are a profitable form of price discrimination. Cutting prices
attracts both price-sensitive prospects and those who would pay the higher
price anyway. If, instead of cutting price, you offer a rebate, many
price-sensitive buyers will go for the deal and some will apply for the
rebate. But less price-sensitive buyers who also go for the deal won’t be as
eager to return the rebate form. In effect, they pay the higher price anyway.

Think of it this way: If every buyer collected on every rebate offer, rebates
wouldn’t be worth a seller’s effort. A price cut would work just as well.
But, by exploiting the psychology of the buyer, you can make rebate offers
quite profitable. This is a direct example where procrastination by others
can put added money in your pocket. Most rebate deals give the perception of
price-cutting without actually becoming the price cut they appear to provide.

Discounting: Proceed Cautiously

Another approach is to alter the list prices of your products based on a
discount or allowance. A discount is a reduction from the list price that you
apply to a customer’s purchase when they meet certain conditions. These
conditions include paying cash instead of using a credit card, paying in full
upon purchase, paying early with net terms, buying a volume of books, or
buying during a seasonal promotion.

A customer may also qualify for a reduction from the list price by performing
some activity. This is an allowance. It works like a discount. An allowance
can be a reduced price for participating in a community service project or
becoming a member of a certain club or organization.

To some publishers, the list price is simply a reference from which to
discount. In this instance, products are rarely sold at list price. If this
is how you operate, you’re bound to encounter buyers who only care about the
difference between what you list and what they actually pay.

The value of discounting is often overestimated. Research reported inEntrepreneur Magazine shows that some sellers must lower prices by 65% to
substantially affect demand. This percentage may be lower in certain
industries. Pricing is specific to circumstance. And increasing demand is not
as simple as just lowering price.

The risk here is that you must cover not only the cost of your goods and
labor, but you must also account for basic selling expenses such as
marketing, advertising, and commissions. And the results of discounting are
often temporary.

Price is often used as a tactic, not a strategy. If customers base their
buying decision on price alone, you can always be slower in shipping, as long
as you offer the same quality and information as your competitor, but at a
much lower price–20% is a much lower price.

Discounts tend to reduce customer loyalty. Discount buyers are easily lured
away when another seller offers a deeper discount. And the risk exists that
discounting can undermine a seller’s credibility. Customers wonder what they
would pay if competition hadn’t pressured the seller into offering a
discount.

Immediate discounting from your list prices can make a buyer wonder if
they’re really getting the best deal. Customers who push for discounts can
become suspicious of your pricing once you cave in. They wonder if lower
prices cause compromises in quality or service.

According to Lawrence Steinmetz, author of How to Sell at Prices Higher Than
Your Competition
, there is no evidence that long-term success goes to sellers
who consistently discount. Steinmetz feels that slipped profit margins always
catch up with you. None of the top discount chains of 1962 are around today.

Summary

As publishers become better at pricing, individual buyers usually aren’t
offered discounts. Yet there is a time and place for everything. Subtle price
reductions can help increase sales during slow business cycles. Try coupons
and rebates, but discount with discretion.

Robert Brenner is the president of Brenner Microcomputing, Inc. and the
general manager of Brenner Information Group. He is also a popular speaker
and the author of 19 books and over 250 articles. He can be reached at PO Box
721000, San Diego, CA 92172-1000, phone 619/538-0093, fax 619/484-2599, or
email Binfog@aol.com.

[This article is from thePMA Newsletterfor February, 1997, and is reprinted with permission of Publishers Marketing Association.]

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