The Art of Discounting

Most companies view discounting as a white flag—an admission of defeat that a product isn’t selling as well as hoped. The result is a lack of managerial enthusiasm for lowering prices. My take is very different. Discounting is a superhero strategy: It’s powerful, swiftly achieves results, and can be summoned at a moment’s notice. In an era of rising prices and consumer anxiety, if your company isn’t embracing discounting, it is missing out. Effective discounting uses a price cut to attract new customers—with one important caveat. The strategy must be designed to prevent (or more realistically, limit) those who would normally pay full price from taking advantage of a discount. This profit cannibalization is the scourge of discounting. The goal is to keep current customers purchasing at full price (or get them to buy even more) while using discounts to attract new customers. When done correctly, it creates an opportunity to generate incremental profits. McDonald’s is a great example of a company that’s focused on remaining price-competitive amid inflation and uncertainty. In a July 2024 quarterly earnings conference call, executives used the word “value” nearly 80 times to reflect the importance of the pricing-related challenges and opportunities in this economic environment. The fast-food chain has rolled out an armada of discounts, including $5 meal deals, buy one/add one for $1 deals, Extra Value Meals previously used during Covid, and, more recently, under $3 menu items and $4 breakfast meals. Citing same-store sales growth of 5.7% for the quarter ending December 31, 2025, CEO Chris Kempczinski highlighted that reduced prices were bringing more diners into its stores and emphasized that “McDonald’s is not going to get beat on value and affordability.” While a well-planned discounting strategy can boost profits, a lackadaisical one can inflict damage. Ask yourself, “How much thought is given at my company when handing out discounts?” Remember, your profit comes from the final dollars of your price. Thus, discounts are directly deducted from your profit. The average net profit margin for S&P 500 companies in the fourth quarter of 2025 was 13.2%. Haphazardly giving away 10% is not trivial. The art of discounting involves knowing when and how to cut prices to generate new sales and increase profits. Five Effective Discounting Strategies The mantra of effective discounting is to reduce prices to meet customers’ needs. This article focuses on five key opportunities. Serve customers who value products at less than their selling prices. As a graduate student in upstate New York, I learned many pricing theories. But perhaps one of the most impactful lessons I picked up occurred off campus…at a liquor store. A sign posted above the cash register at this liquor store stated, “Ask me about a discount.” Of course, I wanted to know more. The clerk excitedly shared that by joining their club (no fee), I would receive 5% off all purchases, plus an additional 5% if I purchased full cases. Confused, I inquired, “Why wouldn’t everyone sign up for a discount?” The clerk’s response was insightful: “Because not everyone cares about price.” This is an important lesson for everyone to master. Ask yourself, do you diligently search for discounts for every one of your purchases? Remember the downward-sloping demand curve from Economics 101? Consumers situated at the top of the curve will pay more than those towards the bottom. Think about your favorite product. Would your friends and family pay as much as you? The amount that one is willing to pay for a product is subjective. Much like beauty, value is in the eye of the beholder. So do not take it personally that some think your price is too high. Blame it on the subjectivity of taste. The challenge of selling to customers who value a product differently is avoiding cannibalization. To prevent profit leaks, it is common to erect hurdles that price-sensitive customers must clear to secure a lower price. Consider a customer who shows up at Six Flags amusement park with a Coca-Cola can to save $10 on admission. They are tipping you off that price is important to them. Ditto for those who request a price match at Best Buy. They are proclaiming, “Price matters to me.” Common hurdles include coupons, online discount codes, rebates, holiday sales, email sign-ups, and price matching. Another hurdle is simply waiting to see if a customer asks for a lower price. Every year when my subscription to a streaming service is up for renewal, I call to grouse, and presto, my price is lowered. I asked a customer service representative why I have to go through this annual ritual of gamesmanship. His response, in the same vein as the liquor store clerk, was: “Not everyone calls to ask for a price reduction.” Another tactic to identify budget-minded customers is to price based on readily identifiable characteristics. Senior citizens are often viewed as deserving of a price break. Walt Disney World offers lower prices to Florida residents. It makes sense that families who have traveled thousands of miles to visit the theme park are willing to pay more than locals. What should sellers do about customers who value (and can afford) a product, but take advantage of discounts? My advice is to welcome their revenue. For deal seekers, receiving a price break is a strong motivator to purchase. Remember the mantra: meet customers’ needs. In addition to generating new profits and growth, discounts can serve customers who are important to a company’s mission. A dentist friend shared that he recently read my book, The Art of Pricing. As a result, he decided to offer a discount to select budget-conscious seniors. If they could come in for a cleaning with 24 hours’ notice, they would receive a 50% discount. Sure, he earns more with this strategy–instead of sitting idle due to vacant appointments, his salaried hygienists now generate revenue. However, he seems genuinely pleased to serve price-sensitive customers who benefit from his services. Prompt current customers to purchase more. Bundling and quantity discounts can incentivize customers to make additional purchases. Bundling involves selling two or more products at a price that is often lower than the sum of their individual ones. (Think fast food value meal.) As I highlight in this article, bundles do not have to be highly discounted and, in fact, may be sold at a premium—but the reality is, many do feature a lower price. Quantity discounts are meant to sell more by capitalizing on the law of diminishing returns—the more you consume, the less you value an additional amount. 7-Eleven does a wonderful job of setting its drink-size prices in a manner that prompts customers to perseverate over whether to pay a little more for a lot more soda. Discounts on popular products can also be used as doorbusters to attract customers who make additional full-priced purchases. Discounting turkeys at Thanksgiving or, similarly, popular products in weekly grocery ads, draws in shoppers in hopes of prompting additional sales. Discounts can serve as a starting point for upselling complementary items. A low-priced cell phone plan can encourage purchases of cell phones, high-margin insurance, covers, and streaming services. Similarly, a discounted oil change coupled with a free inspection can lead to additional repair services. Market to new customers. An advertised discount can attract the attention of desirable customers. Businesses often offer partnership discounts to attractive groups (e.g., AAA, AARP) in exchange for promoting their products. Many luxury hotels offer extra benefits and/or discounts to participate in American Express’s Fine Hotels and Resorts program, which is marketed to its premium cardholders. A discount can also nudge ambivalent shoppers to become customers. An online patron who searches for a product, places it in their cart, and abandons it is demonstrating second thoughts. A discount provides an incentive to click “purchase.” Similarly, in B2B sales, a price break can elevate a proposal from “being somewhere in the stack” to the top of a purchaser’s mind. Be sure to place a time limit on the deal to create a call to action. Adjust for changes in market value. The value of a product can change, often drastically. Think about how much higher Uber’s prices are on New Year’s Eve compared to a garden-variety Tuesday afternoon. The goal of dynamic pricing is to keep prices in sync with changes in value. Dynamic pricing is commonly used in the airline, hotel, and amusement attraction industries. Managers can create a solid first cut of dynamic pricing without employing sophisticated algorithmic software. Low demand periods are often straightforward to identify, and discounts can be used to realign prices. Typical discounts involve time (specific hours, days), seasonality, weather, level of competition (if rivals are lowering prices), and complementary events (e.g., sporting events, holidays). Engender goodwill with repeat customers. Sellers often provide discounts to enhance personal relationships with their customers. A nearby Thai restaurant recently offered residents of my condominium complex a 10% discount. It has been a success. While most don’t need the discount, they appreciate the goodwill gesture. This prompts them to visit the restaurant more than they otherwise would. I often see this in B2B sales, too. But remember, a moment of gratitude (“we’ll keep prices the same as last year”) can slice a hefty amount from a profit margin. (Remember the 13.2% average net profit margin for S&P 500 companies). Especially in B2B sales, where the employees who make purchase decisions aren’t spending their own money, it is worth considering cheaper ways to please customers, such as white-glove service, a fancy meal, a round of golf, or complimentary products that customers otherwise would not order. While customers appreciate freebies, businesses should not confuse goodwill with locked-in loyalty. In my experience, customers are quick to defect when a competitor enters the market with a better value proposition. Ask mom-and-pop store proprietors how much goodwill meant when a big box retailer opened up close by. Avoid These Common Mistakes When designing your discounting strategy, keep in mind the following two tips: Many managers do not understand how low they can drop some prices. A common misconception is that every price must cover a product’s total costs (including overhead). This is not true. While total revenue should at least cover costs, discounts on some units can be as low as a product’s variable cost. Any revenue above this gross margin threshold is incremental profit. An often-mislaid hope is that customers who purchase at a discount will return to pay full price. This was a key premise of Groupon, and its stock price history reflects the fallacy of this wish. Topping out at $523, it now trades in the $12–$16 per share range. The reality is that most early-bird customers will not become full-paying diners, which is OK. Remember the mantra: Meet customers’ needs. As long as incremental profit is earned from bargain hunters, bank the money and be grateful. . . . Looking to boost profits quickly? Put on your superhero cape and strategically lower prices. The first step is to understand that many potential customers like your product but aren’t buying it because of the price. The good news is a smart discounting strategy can activate them. Set aside your pride and profit from these buyers. Cutting prices can also be used tactically to sell more to existing customers, market to new customers, adapt to changing value conditions, and enhance customer relationships. Discounting is not an admission of failure; it is an opportunity for managers to boost profits and growth rather than merely defend a price tag.

The Art of Discounting

Summary.

Partner Center