5 risks of deep discounting and couponing for retail brands

When I worked at Sears, Roebuck and Co. many moons ago, I remember several conversations around the rise of Kohl’s. They had become a formidable competitor, mainly by using a strategy of massive discounting and couponing. We marveled at how they always seemed to be offering goods on sale and at ridiculous discounts to boot (25-50% off).

I recall leadership asking if we should try to match them on price to keep pace. Ultimately, they chose to go with stronger brand messaging rather than use discounting as a defensive strategy, which admittedly had limited impact in the short term. These kinds of decisions aren’t easy especially in the highly competitive world of retail, where attracting and retaining customers is so challenging for brands.

Among the myriad strategies used to boost sales and customer loyalty, deep discounting and couponing seem to be one of the more widely-used approaches by retailers. While these methods can certainly offer short-term benefits (mainly in acquiring new customers and boosting transactional volume), they also come with some considerable drawbacks including:

1. Margin erosion: When retailers offer steep discounts or promote regular couponing campaigns, they may find themselves sacrificing profits to meet short-term sales goals. This can be particularly harmful to small businesses or companies with already tight profit margins, as it diminishes their ability to reinvest in product development, marketing and customer service.
2. Diminished brand value: Constantly offering discounts and coupons can create a perception among consumers that the products aren’t worth their original price. As a result, the brand’s image and perceived value may be eroded, leading to a potential loss of trust and loyalty from customers. And once the brand loses its premium status, it becomes challenging to revert to a higher pricing strategy in the future.
3. Cannibalization of sales: When customers get accustomed to expecting discounts, they may delay their purchases until the next promotion, leading to reduced sales during regular pricing periods. Consequently, brands may experience a revenue drop when promotions are not active – undermining long-term financial stability.
4. Attracting deal-seeking customers: Deep discounting and couponing can attract a particular segment of customers known as deal-seekers or bargain hunters. These customers are often less loyal and more likely to switch brands when a better deal comes along. Thus, retail brands may find themselves trapped in a cycle of continuously attracting and losing customers without building a strong and loyal customer base.
5. Impact on perceived product quality: Consumers often associate discounted products with lower quality, assuming that the brand is trying to offload undesirable inventory. This perception can be damaging, especially for premium and luxury brands that rely on their reputation for high-quality products. Discounting can inadvertently harm the brand’s image and hinder efforts to position products as exclusive and top-tier.

For a real-world example of how couponing and deep discounting can sink a retailer, look no further than Bed Bath & Beyond. Their “blue coupon cards” (with 20% off discounts) were ubiquitous for years and inspired a cult-like following. Shoppers everywhere collected those cards like they were gold. For a time, it drove traffic and created some brand differentiation for Bed Bath & Beyond. However, this practice slowly – inexorably – led to an unhealthy dependence on coupons by shoppers, which cannibalized sales and ultimately eroded margins and profitability (not to mention brand value) causing them to go out of business.

It’s important to note that the risks associated with deep discounting and couponing are not unique to Bed, Bath & Beyond. Other companies are also subject to similar risks, depending on the extent to which they rely on these strategies and how they manage the associated challenges. Retailers such as Kohl’s, JCPenney, Macy’s, Michaels, and Office Depot/Office Max, are a few of the notable companies that may want to reconsider their strategy on aggressive couponing and discounting, lest they become the next Bed Bath & Beyond.

While deep discounts and couponing may increase short-term sales, the long-term consequences can be detrimental. Lower profit margins and a diminished brand reputation can make it difficult for companies to invest in innovation, marketing, and employee training – all of which are essential for long-term growth and sustainability.

To strike the right balance between promotional activities and maintaining brand integrity, retailers should focus on delivering value through exceptional products, enhanced customer experiences and targeted marketing strategies rather than relying too heavily on frequent discounts and coupons.