Marketers are always stressed out at the beginning of a new year. They are either worried that a client will not renew their services due to a lack luster year or even more terrifying.. they will have to improve on stellar numbers from last year. So the internet marketing world goes a blaze with tactics to kick the year off right. No topic has been more discussed (at least in the blogs that I follow) than incentivized marketing, or selling at a discount. The experts seem to split down the aisle more than a senate hearing. Some say it can save your business while others says its the worst thing you can do for your business. To explain my point of view I would like to discuss my drinking habits, happy hour pricing and double shots.. I mean double selling.
My drinking habits are probably pretty similar to other 25 year old males that work from home with little responsibility outside of my future wife’s happiness, my dog’s happiness and bills. I usually complete most of my day’s work early in the morning. Waking up early has always motivated me to get things done throughout my life. Getting my chores done early as a kid meant my parents would drop me off at the local public golf course. Now the reward has changed a little. (Golf is mad expensive)
Usually around 3 PM I will get bored with whatever task I am doing and want to go out to do something. That something is usually a long walk on the beach, a cheap round of golf or a cool dive bar with a crazy happy hour special. While not the noblest of pursuits it is one which passes the time at a reasonable return on investment. Happy hour pricing is really the only reason I would go out to a bar. It sure isn’t for the amazing atmosphere or possible networking connections.
Happy hour pricing is the PBR of incentivized marketing. Meaning its the lowest common denominator (this coming from an ardent PBR supporter) and easiest to understand for non marketers (and me). You take money off your normal price to attract more customers. This can relate to startups or even established brands that offer 30% off to sign up for a membership or buy their product. Seems like a great idea right?
Well no. Let me first outline why happy hour pricing fails to actually incentivize people as a loyal customer. In the 4 years that I have been of legal drinking age I can count on one hand the number of times I have bought a drink at a bar outside of the happy hour or current drink special price. Bars’ margins on their happy hour pricing around my neck of the woods are extremely low. Rents are high and tourists are cheap. Welcome to a Florida beachside community.
Even though bars around here may be busy during these happy hour special times they are not making money. After talking with a few bar owners they seem to agree that it is a loss leader. Meaning that they take a loss on some items in hopes of drawing in more business at other times leading to sales that have higher profit margins. we can relate this to 30 day free trials or giving away a gift to sign up for a newsletter. Seems like an ok strategy right?
Well no. The more I probed the bar owners about the actual results of this incentivized marketing process the more I learned that it wasn’t a brilliant marketing ploy. It just lead to losses with no leaders to other more profitable items. Their bars would empty out during fully priced times and the losses would continue.
This got me interested in learning how incentivized marketing works for startups and entrepreneurs trying to grow their businesses. All over the web we see deals like 75% off your first month, 30% off when you refer a friend and other seemingly great deals.
While interviewing a few startup owners and marketing leads I saw a pretty consistent trend. The trend can be broken down into two main problems. I have listed them out in detail below:
- Lower prices don’t mean anything if your product sucks.
- Most businesses assume that if they lowered their prices more people would automatically become interested in their product. This isn’t the case. You might be offering me 30% off of a product that is inferior to a competitor whose price is twice as much. When it comes to SaaS based businesses or most other tech startups their product is more important than their price. You might get someone to purchase the product with the lower price, but once they realize it is inferior they will jump ship to your competitor.
- You have to convince people not once but twice
- So you proved my first point wrong. You got someone to sign up for your service at an incentivized price. Awesome! You convinced your lead into purchasing your product. Now what happens when the special pricing runs out? You now have to convince them again that you are worth an even higher price. Remember my ramblings about bars emptying out after happy hour pricing? That is the last thing you want to see happen to your business.
So just as bars draw in tons of traffic with special deals yet more often than not get little in return, your startup or small business might see a hike in 30 day trials or special pricing, but your churn (customer retention) will go through the roof.
Successful incentivized marketing really relies on having a great product with a price point option that makes sense for every type of possible successful customer in the market. Even if you get more signups at a price point that is lower than you would like, you still have the opportunity to wow them and prove yourself worthy to upgrade to a package with more features.
So the only incentive or discount you should promote is the usefulness of the actual product or service. If you have a product that helps people make money or saves them from a certain pain you can always find more customers and turn your existing customers into loyal higher paying customers.
Instead of offering a discounted price for your product as an incentive, strip out some of the features and offer it at a lower price point. I guarantee your churn rate will be lower and you will have more opportunities to have clients interested in your upsells. None of the bars that I would actually go to for a late night full priced drink offer a happy hour special. They instead focus on providing a better product, atmosphere and level of service.