6 Signs of Overdiscounting and Alternative Strategies to Build Growth

Discounts can be an effective part of an organization’s sales strategy. They help attract new customers to try new products or services, encourage larger purchase volumes, clear excess inventory, and improve short-term cash flow, among other benefits. But as Mark Twain once said, “Too much of anything is bad” (whiskey excluded). When companies rely too heavily on discounting, not only do they risk narrowing their profit margins, but they could also devalue their offerings and sabotage their competitive standing.

What Is Overdiscounting?

Overdiscounting occurs when a business repeatedly lowers its prices to generate sales, ultimately undermining its profitability and market position. Overdiscounting creates a pattern whereby customers come to expect and wait for discounts, rather than recognizing a product’s true value. For example, if a retailer regularly offers 20% off promotions at the end of each month, customers learn to postpone their purchases until then, making it difficult for the business to earn a full-price sale.

Key Takeaways

• Use discounts wisely to preserve profit margins.
• Overdiscounting can diminish the perceived value of a product or service.
• It can also train customers to wait for a discount before making a purchase.
• Alternatives to discounting include value-added promotions and loyalty programs.

Overdiscounting Explained

When used strategically, discounts can help businesses achieve specific objectives, such as to boost sales, clear slow-moving inventory, acquire new customers, or respond to seasonal demand fluctuations. For instance, a targeted discount can encourage first-time buyers to try a product or service, potentially converting them into long-term customers willing to pay full price.

However, businesses might find themselves in dangerous territory when they use discounting as a default strategy, rather than as a tactical tool. To begin with, each percentage point of discount directly reduces revenue and profit margins, which can hamper financial stability and make it difficult to fund growth initiatives. To compensate for the loss, businesses might have to seek ways to cut costs, such as sourcing from subpar suppliers or cutting back on quality-control steps, which can directly compromise product quality, as well as their top and bottom lines.

Another issue caused by frequent discounting occurs when customers begin to question the true value of the products or services that are regularly offered at reduced prices. Over time, these lower prices become embedded in their minds as the expected price point, aka as the “reference price.” When reference prices drop while expectations for discounts increase, it creates a vicious cycle where businesses must offer increasingly deeper discounts to maintain sales impact, further eroding profit margins and brand value.

Signs of Overdiscounting

While occasional discounts can promote short-term sales and cash flow, several telltale signs indicate when a discount strategy has become excessive and potentially harmful to the business. Recognizing these red flags early—often with the aid of a real-time accounting, financial, or enterprise resource planning system—allows businesses to correct course before significant financial and reputational damage can occur.

The following half-dozen impacts highlight the ways a business’s discount strategy may be doing more harm than good.

• Impacts to profit margin: Despite steady or increasing sales volume, gross margins consistently fall below the business’s previous performance and industry standards. The business also struggles to maintain healthy cash flow even during peak sales periods.
• Impacts to customer expectations: Customers regularly delay purchases, waiting for promotional periods rather than buying at full price. Customers begin to question the original pricing structure and perceive those prices as being artificially inflated.
• Impacts to brand image: The business develops a reputation as a discount brand, making it difficult to maintain premium positioning in the market. Customers begin associating the brand primarily with “cheap,” not “quality.”
• Impacts to sales cycle: Revenue patterns become irregular, with spikes during promotions followed by prolonged slow periods, as customers await the next discount. The business becomes dependent on discounts to meet basic revenue targets.
• Impacts to value proposition: Sales conversations center primarily around price rather than a product’s or service’s benefits and quality. Customers associate the brand as the price leader but not necessarily as the value leader; loyalty shifts from brand preference to price sensitivity.
• Impacts to competitive advantage: The business finds itself in a constant price war with competitors. Market differentiation erodes as price becomes the primary factor in customer decision-making.

Strategies and Alternatives That Combat Overdiscounting

Judicious use of discounts can help companies meet their short-term business objectives. However, the following list of alternative tactics can help them achieve similar results without having to sacrifice long-term value and profitability.

Value-Added Promotions

• Free gift with purchase: Pairing a free, complementary product with a purchase adds perceived value without directly discounting the primary item. For example, a bicycle shop might offer customers a free analog air gauge with the purchase of a bike pump. Similarly, offering the additional item at a discount—aka the “discount consolidation effect”—can also influence the likelihood of a purchase, according to the Journal of Consumer Psychology.
• Personalized services: Premium services, such as expert consultation or priority support, can motivate a purchase. This approach differentiates the offering beyond price and builds stronger customer relationships. Customized product recommendations and cross-selling also fall into this category.
• Free shipping: Shipping products for free is often less costly than the amount of money lost from direct discounts, yet still meets customer expectations for value. This benefit is particularly effective for online retailers where shipping and return costs can be a major purchase barrier. In addition, eight out of 10 online shoppers surveyed by Deloitte said they are willing to meet a minimum purchase threshold to get free shipping.

Targeted Discounts

• First-time customer discounts: Rewarding a customer’s first purchase with a discount can be an effective way to bring in new business. This approach can also persuade potential customers to take other types of actions, such as downloading a company’s mobile app.
• Seasonal discounts: Promotions that align with seasonal business cycles help companies manage their inventory and cash flow. For example, a beach resort might discount rooms during the peak summer season to clear any remaining rooms, while others might offer winter discounts to attract budget-conscious travelers during off-peak periods.
• Flash sales: Limited-time promotions build a sense of urgency and excitement that motivates quick purchasing decisions. For example, a software security company might offer prospects a 48-hour promotion on annual subscriptions to drive fast conversions. This tactic is based on the scarcity principle: When customers know an offer is available for only a short time, they’re more likely to act quickly rather than delay their purchase decision.

Reward Programs

• Loyalty programs: Points-based systems encourage repeat purchases while maintaining regular pricing, protecting the perceived value of products. The tactic is effective, according to Merkle’s 2024 Loyalty Barometer report, which found that 81% of consumers purchase more frequently from brands because of their participation in a loyalty program. Seventy-six percent also say they spend more.
• Earned rewards: Offering benefits based on purchase volume or frequency creates a sense of exclusivity and achievement. For example, airlines commonly open access to their VIP lounge to travelers who fly a certain number of miles within a year.

Branding, Marketing, and Customer Experience

• Align your experience with your unique value proposition: A value-based pricing strategy helps customers focus on a product’s or service’s benefits, highlighting distinctive features and superior quality to justify pricing. For example, a cloud storage provider might emphasize its enhanced security protocols and 24/7 support rather than compete on price with basic storage services.
• Enter strategic partnerships to improve visibility: Strategic business partnerships extend the market reach of both parties by tapping into each other’s customer base. For example, a wellness spa chain might partner with a premium skincare brand to entice customers with new specialty treatments, while at the same time providing the brand with direct access to luxury-minded consumers.
• Enable your customer service team: A stellar customer experience starts with effective, efficient customer service. Knowledgeable, well-trained service representatives can capably communicate product value, assist with product or service selection, and resolve issues.

Use CPQ Software to Optimize Pricing Strategies

When sales representatives face pressure to close deals quickly or struggle with complex product configurations, they may resort to excessive discounting. NetSuite CPQ—an acronym for configure, price, and quote—helps prevent this tendency and protects profit margins through automated pricing rules and streamlined approval workflows that enable teams to generate accurate quotes through intuitive pricing and discounting configuration capabilities.

NetSuite CPQ simplifies complex product selections by guiding sales teams through each configuration step, automatically applying business rules to prevent errors. Real-time pricing is updated as options are selected, eliminating manual calculations and guesswork. Sales representatives can then quickly generate professional proposals, complete with branding and detailed product specifications. The cloud-based system, which works seamlessly with NetSuite Enterprise Resource Planning (ERP), NetSuite Customer Relationship Management (CRM), and NetSuite Ecommerce solutions, walks representatives through targeted questions about customer needs, then recommends the most suitable products and services. These features, and more, help deals move forward quickly, produce accurate quotes, maintain profitable pricing—and win more business going forward.

Though strategic discounting has its place in certain situations, relying too heavily on price reductions can hurt a business’s profits and brand perception in the long run. Alternative promotional methods that focus on adding value, targeting specific customer segments, and building long-term relationships can break the dependency on discounts. Whether through loyalty programs, strategic partnerships, or enhanced customer service—supported by CPQ software to maintain pricing discipline—businesses can drive growth while protecting their margins and brand value.

Overdiscounting FAQs

What are the four common types of discounts?

Four common types of discounts are percentage discounts, volume-based discounts, cash discounts, and seasonal discounts. Which one to use will depend on the specific business objective, such as to improve cash flow, clear inventory, or encourage larger purchases.

What percentage of sales should discounts be?

The answer depends on desired profit margins, business objectives, and other factors. Some research has shown that consumers generally expect discounts to begin at 10%.

What is the Rule of 100 in discounts?

The “rule of 100” says to use percentage discounts when products or services cost under $100 and dollar amount discounts over $100.