Stop Discounting the Customer: The Smart Pricing Shift That Protects Profit and Goodwill
Pricing Pointers, Issue #35
I once ate at a restaurant—I’ll call it Dutch’s—that didn’t have a senior citizens section on its menu. Instead, it had a “seasoned citizens” section. The selections were smaller portions of dishes listed in other parts of the menu, but these selections were at lower prices. Furthermore, anyone, regardless of age, could order from this part of the menu.
Genius! Why? Because Dutch’s pricing scheme side-stepped three pitfalls of giving a price discount to someone because they are a member of a particular group.
Pitfall #1: Giving Unnecessary Discounts
Not every member of a group is equally price sensitive. Take senior citizens for example. Yes, many seniors are on fixed incomes and have limited financial resources. But others are prosperous, and you can get their business without a price discount. So a price discount given to every member of a favored group hurts your revenues and profits.
Dutch’s restaurant made its customers prove they were price sensitive by accepting a smaller portion in return for a lower price. If you didn’t want a smaller portion, then you had to pay full price.
Pitfall #2: Eroding Your Margins
Offering the same product at a reduced price also reduces your profit margin. For example, selling a $15 dish that has $5 of ingredient costs leaves $10 to pay for overhead and provide a profit. Selling that same dish for $12, leaves only $7. Dutch’s restaurant safeguarded its profit margins by selling versions of its regular dishes that cost less to make. This strategy ensures that a lower price is always tied to a lower production cost, effectively protecting its profit margin in dollar terms.
Pitfall #3: Offending Your Customers
There are multiple ways to offend your customers with such a pricing scheme. For example, suppose you assume someone is a senior citizen and automatically give them your senior discount. People who haven’t reached that age yet might be offended that you think they look “old.” (This happened to me once. In my case, I wasn’t too proud to take the unasked-for discount. If they wanted to throw some of their profit away, I was happy to take it.)
You’re on pretty safe grounds offering a price discount to senior citizens, at least for now. But other categories of people are more problematic. In 2018, a restaurant owner in the U.S., trying to drum up more business on Sundays, offered a 10% discount to anyone who brought in a church bulletin. His pricing scheme attracted nationwide criticism, negative publicity, and threats of lawsuits.
Dutch’s restaurant side-stepped this pitfall by making its reduced prices available to everyone, not just members of a particular group. Everyone who ordered the same item, paid the same price.
What Can You Learn from Dutch’s Restaurant?
Instead of blindly giving price discounts to certain groups of customers, critically evaluate your current price structure to avoid:
Giving unnecessary discounts
Eroding your profits
Inadvertently offending your customers
Consider implementing the pricing strategy exemplified by Dutch’s restaurant: offering reduced-priced, lower-cost versions of your products. Let customers “prove” how much the price matters by choosing a smaller or less-costly option.
Focus on what is discounted rather than who gets the discount. This is the key to safeguarding your revenue, protecting your margins, and preventing customer offense.