Discount dilemma: Navigating the power and perils of discounting for startup brands

As these brands seek to establish themselves they constantly grapple with the question of customer acquisition vs profit margins. Industry experts weigh in.

"SALE! SALE! SALE!"

Signs with these words are common at storefronts. They instantly draw you into the store. In the online world, promo codes have replaced these store signs, urging consumers to add more items to the cart and eventually pushing them to make the purchase. For startup brands, as they struggle with customer acquisition, the allure of offering discounts is undeniable. But they also need to grapple with the complexities of brand equity, sustainability and profit margins.

At the second edition of Startup Brands hosted by afaqs!, I moderated a panel discussion on “The power and perils of discounting", where we discussed how brands can strike a balance between attracting customers and maintaining profit margins. The panellists included Pradeep Krishnakumar, co-founder, Zouk, Rohit Nandwani, founder and chief operating officer, Hammer, Taniya Biswas, co-founder, Suta and Vanda Ferrao, CMO, WOW Skin Science.

Krishnakumar said there are two key aspects to consider with regard to discounts- the product category and the targeted price points. In high-repeat categories, customers tend to pay close attention to prices, whereas, in less frequent purchases, pricing can be more flexible.

"In the price-conscious Indian market, value matters more than being the cheapest. Discounting should not just be a sales tool; it's a way to discover the right pricing. For most customers, MRP does not matter. They look only at the final price of the product," he said.

Echoing his thoughts, Ferrao said that the concept of MRP is dead. It existed due to regulatory guidelines in India, but in other countries MRP is non-existent. "It has now become a notional number, as brand managers must set an MRP and work backwards," she said.

She believes that Indians aren't just price-conscious; they value additional benefits.

"In a pricing strategy, you must consider multiple factors. There are two things: Being part of consideration is crucial. Seeing the discount, the customer will at least consider you. Second, discounts always lubricate the sales, so it is important when making the purchase decision. Smartly manipulating pricing across the sales funnel is vital for consistent sales growth."

Speaking about the pitfalls of discounting, Biswas said consistent discounting creates an expectation and habit among consumers.

"Our brand typically avoids frequent discounts to prevent customers from becoming reliant on them. However, it depends on the value you offer; if you emphasise quality, discounts may not always be necessary. The main pitfall is potential brand dilution," she said.

Biswas insisted that discounting should align with the short-term and long-term objectives, whether it's clearing inventory or boosting revenue. "Mindlessly discounting without a clear purpose can lead customers to wait for discounts, which isn't beneficial in the long run," she said.

Nandwani said discounts are crucial for initial brand entry, but pricing evolves with competition and brand building.

"Discounting depends on product life cycle and industry. Analysing price elasticity and following market trends is vital," he said.

Watch the full panel discussion here: