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Does Discounting Work in a Recession? (Thinks Out Loud Episode 315)

Does discounting work in a recession? Business owner balances coins on a seesaw

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Google is now showing when companies offer discounts and price reductions in search results. Combine the value of search with the ongoing COVID recession and you might think that slashing prices is the best way to attract business right now. But is it? Will discounts turn your business around? Does discounting work in a recession? Or is there a better way?

As you might imagine, there’s no simple answer to this question. Of course you must provide your products and services to customers that fit their needs. But discounting alone usually won’t cut it. What will? And how do you make your prices (rates, fares, whatnot) work for your business when customers need to control their spending?

This episode of Thinks Out Loud takes a look at how to think about pricing holistically during a downturn. We look at when discounting works in a recession, when it doesn’t, and what you can do to ensure not just improved business, but improved profits too.

Want to learn more? Here are the show notes for you.

Prefer to read? Don’t miss the transcript below.

Thinks Out Loud Episode 315: Does Discounting Work in a Recession? Headlines and Show Notes

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Transcript: Does Discounting Work in a Recession?

Well, hello again, everyone. And welcome back to Thinks Out Loud, your source for all the digital marketing expertise your business needs. My name is Tim Peter. This is episode 315 of the big show. And thank you so much for tuning in. I very much appreciate it.

And I think we’ve got a really cool show for you today. There are a couple of different trends happening right now, a couple of different stories and things going on that are worth talking about and how they come together.

Google Showing Discounts in Search Results

And I want to start with, there’s an article in Search Engine Land that shows that Google is adding a price drop appearance in its rich results in search results. So, if a product or service is lowering their price for a given period, they’re going to show that.

Why is Google Showing Discounts in Search Results?

And I think that’s indicative of two things. And I want you to hang with me on this because there’s a lot going on here. Some of what’s happening here affects some industries more than others right now. If you are a retailer, if you are in hospitality, if you sell a product directly to an end consumer, this is going to be something you’re going to have to deal with much more than say a B2B company, or if you’re doing software as a service or something like that.

At the same time, it is something that everybody deals with more and more every day. And so, it’s worth being conscious of in all these cases.

So, part of what’s happening here is that Google is very concerned about other companies taking share away from it when people search. Here, obviously, they are looking at Amazon because they know that people go to Amazon to shop for products when they’re looking for something. And so, they’re saying, "You don’t have to go there. You just come here and do the search and we’ll help you out. And there is no need to go to Amazon directly."

So that’s one thing, and we seen Google do this before. If you look at the hospitality industry — obviously I do a lot of work in the hospitality industry. I know a lot of my listeners are in the hospitality industry, and I know quite a few are not — but we’ve seen these lessons be learned by other industries. And we’ve seen Google do the same thing with Google Hotel Search or Google Flight Search, to prevent people from going to — I shouldn’t say prevent — to demonstrate to customers that there’s no need to go to Expedia or Booking.com or United Airlines or any place like that, because you can find it all by going to Google.

Google’s biggest fear isn’t that you’re going to search other places in addition to them, it’s that you’re going to search other places instead of them. And so, they want to make sure that you, as a consumer, don’t get in the habit of searching other places. They want to be the one place you go anytime you need to search.

Customers are More Price Conscious Right Now

The other smaller trend we’re seeing here, and I say smaller in the sense that it’s more temporary, is that obviously this is a pretty clear sign that customers right now are more price conscious, which there’s a lot of evidence that shows that. We are in the middle of a now almost a year long pandemic. We are in the middle of a recession that has been going on for at least the last six to nine months and probably is going to last at least for another quarter or two, just because of the nature of when the vaccine is going to roll out, and when people are going to end up vaccinated and feel comfortable going out and buying things in the same way that they did before we were in a pandemic.

Radical Transparency and Price Transparency

And the larger trend that you want to be aware of here, is this tendency towards what I always referred to as radical transparency. I’m not the only one who calls it that obviously, but we see this reality where your customers can know more about your products and your services and your prices then in many cases, your employees do. Your customers have a greater incentive to know about your product and your service and your price, because that matters to them.

How to Avoid Pricing and Discounting Mistakes

And so, I want to talk about this and why it’s really critical that you don’t make a couple of pretty common mistakes in these scenarios that we see lots of people do. And this is all stuff that the hospitality industry has learned for years and is relearning right now. Hotels have dealt with this concept of prices being very, very transparent to customers all over the place.

And now, new industries are starting to fall into this and say, "Oh gosh, this is a thing that we need to be really conscious about." So if you’re not in the hospitality industry, you definitely want to stick around for this because this may be new for you.

If you are in the hospitality industry, you probably want to stick around too, because this is something that’s very meaningful to what you are dealing with right now. And again, probably will be at least until the summer. I’m cautiously optimistic that as we get into the middle of summer, as we get into Q3, as we start getting a good number of people vaccinated, that things will start to come around and maybe customers will start to want to do all of the things that they haven’t been doing for the last, oh, I don’t know, 11 months. And I shouldn’t even say "want to do." It’s clear that they want to do that right now. It’s that, because they’re either concerned about their health or they are concerned about their income, they’re concerned about their finances. They’re not doing them right now.

The other thing I want to point out is a lot of what I’m going to tell you does come from hospitality, but I’ve seen this in other industries as well. And we’ve been through this in my career alone through 9/11, through SARS, through the Great Recession, and through what is now the COVID recession. So this is at least my fourth or fifth time at this particular rodeo.

Addressing Needs of Price Conscious Customers

And so, the first big thing you want to watch out for, and I won’t say it’s a mistake, I will say it can be a mistake depending on how you execute it, is that it’s pretty clear there are going to be customers for whom your regularly priced products or services, whether you’re selling a hotel room, whether you’re selling a meal, whether you’re selling an experience, whether you’re selling a product, a physical thing, there are going to be consumers who are going to be more cash strapped, who are going to be more concerned about the money that they have available to spend.

And, if you know that Google’s going to show lower prices, it’s a pretty common reaction to say, "Well, then what we need to do is we need to drop our prices. We need to show that we can be a really good deal, a really good price to our customers, to get them to buy from us."

And I want to be really clear here that sometimes can work, but what it often can do is put you in a really bad position.

Four Discounting Premises You Must Know

And there are four basic assumptions you should make about offering discounted prices. Three of them always or mostly work in your favor. And one of them is usually a flawed assumption.

So the three things that you need to assume is that:

  • You can either lower costs or afford lower profits at the same time that you’ll lower prices. If you can’t afford the lower price to your customer, if you can’t afford the lower margin, the lower profit, you’re really just setting yourself up for bad news.
  • The second basic assumption you want to make about discounting is that you are providing that lowered price to a specific customer segment or for a specific period. There have to be some hurdles. Otherwise, you are telling your customers that this is now the price of this product essentially forever.
  • And that is the third assumption, the third basic assumption is that you’re willing to live at that new price essentially forever. Because you’re telling the customer that’s what it’s worth. It is always harder to raise prices than it is to lower them. And so, if you’re lowering your price, you need to be aware that that’s the new price for some time to come because pushing that price back up is hard.
  • And then the fourth assumption, the flawed assumption, is that by lowering the price, you’re going to appreciably influence demand. There are cases where that’s true. There are absolutely cases where that’s true, but particularly in an economic downturn, you shouldn’t assume that’s true.

Do Discounts Drive Demand?

Sometimes people may not be buying your product or service because demand is reduced dramatically because of the fact that people can’t do certain things, right? Let’s use the hospitality industry for a very specific case. People mostly aren’t traveling, not because they can’t afford it, but because they’re concerned about their health. They are obviously going to be very price conscious, but the thing that is causing to travel or not travel is their comfort level with getting on an airplane, getting in a car, staying in a hotel, et cetera.

The same is true for people sitting in restaurants. The same is true for people walking around a retail store. So, while you can absolutely use discounts and coupons and things like that to steal share from competitors in some verticals, in some industry, don’t assume that you can do it in all cases.

And the reason that that flawed assumption can be a killer is because today, I just mentioned a moment ago with radical transparency, your customers know all about your prices. Well, your competitors all know what your price is too. And the only thing that can stop them from matching your price, the only things that stop them from matching your price are their cost structure — can they afford to match you — and their willingness to shrink their margins.

Don’t misunderstand, You can always find some idiot or much more likely these days, a tech giant or a tech giant wannabe with deep pockets or venture funding or the like, who can come along and operate at a loss until you’re forced to give up.

But if they’re either better funded or much dumber, this can just turn into something that is a race to zero where you’re continually driving lower profits until one of you has to fold your tents.

There’s a blog post I wrote about this, gosh, I don’t know how many years ago, called "The Race You Can’t Win," and much like the movie WarGames, the best way to win the race is don’t run it.

How to Price Your Products and Services in a Recession

Instead, what you want to be thinking about is do you have different types of customers who have different needs and then think about what are the products that you offer that address those needs.

Now, I’ve been talking all through the pandemic about various ways you can listen to your customers to make sure you’re addressing where they are at the moment. And that’s especially important when it comes to price, because we need to be thinking about what is the value we offer and how are we demonstrating the value.

In a perfect world, you want to have a premium priced product. But you might Need to add things to that product to make that value more tangible and help them understand the value that they received. I did a podcast episode last year called "The Lost Art of Value Adds in Marketing", and it’s particularly relevant in this specific case. What is the value that they’re receiving?

Now, there are also customers who legitimately don’t have the money. And for those customers, you have to make a decision. And it’s not always a pleasant decision. You can say, "Okay, that’s a customer that I just can’t afford to serve." That’s the unfortunate answer. Or you can look at crafting new products that meet their specific needs. Or you can do the alternative to a value add. What can you remove from the product to make it more affordable and still profitable for you?

Now, in some cases, maybe there’s nothing you can take away. Maybe you have product that is sitting on a shelf and is going to expire. In the travel industry, we call that distressed inventory, right? I can’t sell tonight’s hotel rooms tomorrow. They go away. And if they’re sitting empty, maybe it’s okay to discount them to get some profit out of them. Maybe.

Three Types of Discounts to Consider

But you want to look at three different types of customers, three different ways you can discount to make that make sense. And those are:

  • Providing different ways to pay. Do we pay in advance versus pay later?
  • Different offerings, which I was just talking about, value adds or value unders, or…
  • Different customers. Do we promote this distressed inventory to our list of our best customers? To say, "Hey, you’re local, you’re nearby. Here’s something we can make as a special deal for you because you’ve been such a loyal customer to us over time." But you want to put hurdles in place that make it clear to your customers, that this price is limited in duration or focus because of very specific reasons, because that’s how you make it clear to customers that this isn’t a price you’re going to honor forever. This is a price to address a very specific situation. And that situation can be, "we appreciate you." That situation can be, "this is something that’s going to expire and we’d love to get it off our shelves."

There’s all kinds of things you can look there. But you want to think about, are we putting some way that they pay in place that’s different? Are we putting the offering in place that’s different? Or are we putting the customer that’s different? Are we acknowledging that the customer is different? To say, this is why we’re doing this.

Because then, you’re not discounting simply to drive demand. You’re discounting in a way that actually benefits you, that it’s not eating into your costs.

Does Discounting Work in a Recession Conclusion

Now, obviously there’s a lot more detail you can go into, than I can go into in just a 20 minute podcast about why you want to price various products, various ways for various customers, particularly when demand has fallen in some categories. And particularly when we’re in a recession or particularly when we’re in a pandemic.

But the things you want to think about are, A.) Do we know who the customer is? B.) Are we making the correct assumptions about what the needs of that customer are? Do we have the data and the insights that support who that customer is and what is causing them to buy from us or not buy from us? To come into our restaurant or not come into our restaurant? To stay at our hotel or not stay in our hotel? Do we know what’s causing them to make that decision?

And then, are we pricing appropriately so that we can be profitable with a premium level and with a discount level in a way that doesn’t just lower our prices for everybody always? Are we providing different ways to pay, different types of offerings and acknowledging different customers in a way that make our prices make sense and demonstrate value?

Because the best way to get through this recession is not to assume you have to make so much less money. It’s to make sure you make as much profit as is practical on every single sale and set yourself up for long-term success. And that’ll be true no matter who shows that you’ve got a price drop, whether it’s Google, whether it’s Amazon, whether it’s Expedia, whether it’s Booking.com, whether it’s Airbnb, doesn’t matter, It’s going to set you up for a better position, no matter where you end up.

By the way, if you’re interested in learning more about how to do this specifically for the hospitality industry, I’m going to put a link to an article I wrote about the "Backyard and Bundle Strategy," which I also sometimes call "the Local, Loyal, Leisure Strategy." There’ll be a link to that in the show notes. And I’d highly encourage you to check that out.

Show Closing and Credita

Now looking at the clock on the wall, we are out of time for this week. I want to remind you that you can find the show notes for today’s episode, as well as an archive of all past episodes by going to timpeter.com/podcast. Again, that’s timpeter.com/podcast. Just look for episode 315.

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Sponsor Message: SoloSegment

I’d also like to thank our sponsor. Thinks Out Loud is brought to you by SoloSegment. SoloSegment uses machine learning, natural language processing, and all kinds of cool AI to understand customer behavior. They do this using anonymous behavioral data to connect website visitors with the content they need to accomplish their goals and drive conversions for your business. SoloSegment does this in a way that protects consumer privacy and helps drive more leads and better business for you.

You can learn more about it by going to solosegment.com. Again, that’s solosegment.com.

Show Outro

With all that said, I want to say again how much I appreciate you tuning in. It means so much to me that you do this week after week after week, for now 315 episodes of the show. So with all that said, I hope you have a wonderful week ahead. I hope you have a great weekend and I will look forward to speaking with you here on Thinks Out Loud next time.

Until then please, please be well, be safe and as ever take care everybody.

Tim Peter is the founder and president of Tim Peter & Associates. You can learn more about our company's strategy and digital marketing consulting services here or about Tim here.

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