Why Do Brands Frequently Discount Their Products?
Almost every brand discounts at some point, whether that’s a seasonal clearance sale, a coupon in an app, or a straightforward “20% off this weekend” promotion. The reasons behind any one discount can be quite different from the reasons behind another, even though they all look like the same basic move from the outside. So it’s worth going through the main reasons separately, because they lead to different managerial decisions.
Clearing Out Inventory We Don’t Want to Hold Onto
The simplest reason is that we have stock we need to get rid of. Apparel is the obvious case: a retailer buys a season’s worth of clothing months in advance, and whatever doesn’t sell at full price by the end of that season is worth less to hold onto than it is to move at a discount, especially with next season’s stock already arriving. Groceries work the same way with perishables nearing their sell-by date. Electronics do it too, discounting the current model heavily the moment a new one is announced, because nobody wants to be sitting on the old version once its replacement is on shelves.
In all these cases, the discount isn’t really about the customer. It’s a way of converting stock that’s losing value with every week it sits in a warehouse into cash we can actually use, even if that cash is less than we originally hoped for.
Reaching Price-Sensitive Customers Without Cutting the Price for Everyone
Here’s a different reason, and it’s a smarter one in a lot of cases. Not every customer needs the same price to buy. Some people would happily pay full price and were never going to be lost over a discount. Others genuinely won’t buy unless the price is lower. If we just cut the price for everyone to capture that second group, we’re giving away margin on the first group for nothing.
Coupons and targeted app discounts solve this by requiring a bit of effort, clipping the coupon, downloading the app, or hunting for the promo code, that price-sensitive shoppers are willing to put in and everyone else mostly isn’t. Student and senior discounts do something similar, splitting customers into groups based on how price sensitive they tend to be, and pricing accordingly. This is a form of price discrimination, and it’s a completely normal, legal part of marketing.
Driving Trial, Volume, and Matching Competitors
Discounts also get used to push short term volume. A new product might launch at an introductory price to get people to try it before they’ve built any loyalty to a competitor’s version. A brand chasing a quarterly sales target might run a promotion specifically to hit the number. And if a competitor cuts its price, we’re often more or less forced to respond, or risk losing share to a rival that suddenly looks like better value.
The Psychology of a Discount
A discount doesn’t just lower a price. It changes how the price feels. “Was $50, now $35” reads as a bargain in a way that a plain $35 price tag never would, because the crossed-out $50 gives us a reference point to compare against. This is why retailers sometimes set an initial price with a permanent discount already built into the plan, rather than genuinely testing what customers will pay at full price. Regulators in a number of countries have rules about this kind of reference pricing, requiring that the “original” price actually was charged for a meaningful period, precisely because the practice can shade into being misleading.
What Can Go Wrong With Discounting
The most common problem is that customers learn to wait. If we discount often enough, on a predictable enough schedule, shoppers stop treating full price as the real price and start treating it as the price you pay if you weren’t paying attention. Once that happens, the discount stops driving incremental sales and starts just eating into margin on purchases that would have happened anyway.
JCPenney gave us a well documented example of what happens when a retailer tries to reverse this habit too abruptly. In 2012, under CEO Ron Johnson, the company scrapped its constant stream of coupons and sales in favor of simpler, permanently lower “everyday” prices. Sales fell sharply within months, because JCPenney’s customers had been trained for years to shop around sales, and a fair, honest price with no discount attached didn’t feel like a deal to them at all. The company brought back coupons and clearance events before the year was out.
Let’s work through the margin math, because it explains why discounting is riskier than it looks. Say a product costs $50 to produce and sells for $100, giving us a 50% margin and $50 of profit on each unit. If we discount it 20%, down to $80, our profit per unit drops to $30, a margin of 37.5%. To make the same total profit as before on, say, 100 units sold at full price ($5,000), we’d now need to sell about 167 units at the discounted price. That’s a 67% jump in volume just to stand still on profit. If the discount doesn’t generate that much extra demand, we’re worse off than if we’d never run it.
Deciding When and How Much to Discount
Given all that, the decision isn’t just “should we discount,” it’s how deep, how often, and to whom. A shallow, occasional discount aimed at a genuinely price-sensitive segment, through a coupon or a loyalty app, tends to protect margin while still growing volume. A deep, constant, storewide discount risks becoming the new normal price in customers’ minds, which is much harder to walk back, as JCPenney found out.
Premium brands often manage this by keeping the main product line at full price and pushing excess stock through a separate channel instead, like an outlet store or an off-price retailer, so the discount never shows up next to the full-price product and doesn’t train regular customers to expect a markdown. Whatever the approach, we need a forecast of how much extra volume a discount is actually likely to generate before we run it, not just a hope that customers will show up.
Key Points to Take Away
- Discounts get used for several different reasons: clearing inventory, reaching price-sensitive customers, driving trial or volume, and matching competitors.
- A crossed-out reference price makes a discount feel bigger than the numbers alone, which is why some regulators require the original price to have been real.
- Because margin drops faster than price on a percentage discount, a markdown needs a meaningful jump in volume just to break even on profit.
- Frequent, predictable discounting can train customers to wait for a sale, as JCPenney learned when it tried removing coupons in 2012.
- Targeted discounts, such as coupons or loyalty offers, tend to protect margin better than broad, storewide markdowns.
