Have you got an addiction to discounting?

By: Drayton Bird

Date: 13 April 2011

I am one of the most disorganised jokers you'll ever meet but a book by one of the world's best organised people influenced me hugely ... even if it didn't do much good.

It was "My years with General Motors" by Alfred P. Sloan.

Sloan led General Motors to become the world's largest motor manufacturer. It was so important to the US economy that they used to say "What's good for General Motors is good for the USA."

But General Motors - and Ford and Chrysler - got into terrible trouble and had to be bailed out, barely surviving.

There were many reasons why, but one was their marketing. Besides the fact that their ads all tended to be boastful and dull, they fell into a habit I see as the marketing equivalent of crack addiction: heavy discounting.

This gives an immediate boost to sales, but you become addicted to it. And you get nasty after-effects - as with crack.

  • The people who buy most from a promotion are your best customers, who would have bought anyway
  • People bring forward their buying so there is a slump afterwards
  • You are training your customers to expect bribes

To explain more why this is so dangerous, I must take you back 25 years.

Ogilvy and Mather had a unit called the Ogilvy Centre for Research in San Francisco. The Director, Alex Biehl, worked on a project called PIMS - which stood (I think) for Profit Impact of Marketing Strategies.

The aim: to discover how different marketing weapons affect profits.

Over 200 firms took part. One thing the project revealed was very simple, very important - yet is news to almost all marketers.

Firms that spend more money on discounting than advertising are far less profitable than those that spend more on advertising than discounting.

The project divided firms into four quartiles. Those in the top quartile spent most on advertising and least on discounting. Those in the bottom quartile did it the other way round.

The ones in the top quartile were on average twice as profitable as those in the bottom one.

Think about it. When you spend more on offering deals than explaining why people should want to buy your stuff, you are perilously close to saying, "Our stuff is not good enough to sell on its merits at full price."

To go back to where I started, today General Motors is no longer the world's biggest automotive firm. Toyota is.

Another brand once led its market but no longer does. It is Dell.

And guess what? Every single email Dell sends me offers a deal.

They have been overtaken by Hewlett Packard and Acer.

I am not saying never discount. I offer discounts all the time.

Nor am I saying traditional advertising is the answer to your problems.

What I am saying is that messages that give people reasons, emotional or rational, for buying are the key to building your business and brand.

By the way, never forget: one person can be a brand, as I reflected last night when I passed Jamie's Italian in Bristol - which was, as always, packed out.

It has done so well so fast that I believe it's going to be floated on the stock market.

Drayton Bird is an expert contributor to Marketing Donut. He runs Drayton Bird Associates and is a renowned direct marketing teacher, speaker and author.

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