The Dangers of Deep Discounts

Thankfully [at least for businesses], deep discounting is on the decline. The Groupons of the world proved this method’s ineffectiveness—a 50+% discount will win the battle by getting people through your doors, but will ultimately lose the war in that these people will not return to pay full price. Part of this method’s failure is due in part to the audience: bargain hunters will always be bargain hunters, and extracting loyalty from this group is as likely as leaving full from a small plates restaurant.

The other reason for the failure of deep discounting is more universally applicable, and it’s called the ratchet effect. In short, people have an easier time paying less money for something, but once they experience the discount they have a much harder time paying the original price. The discount doesn’t have to be extreme, either. Even a 10% cut can be hard to recover from, depending on the discount’s frequency and timing.

Alternative marketing methods can certainly work in lieu of discounts, but if you still feel compelled, here are a few tips to discount more strategically:

Focus on high-margin items
If you’re going to offer a discount, be sure that you’re not selling at a loss. The higher the margin is on a particular item, the more you can afford to discount it. Just be sure to vary your discounted item mix enough so that guests don’t feel alienated with discounts limited to soups and vegetarian pastas.

Focus on secondary menu categories
Appetizers, sides and desserts should take priority in the discount lineup. Entrees are likely the backbone of your restaurant, so discounting the secondary categories can create a win-win by both bringing people in through the door and encouraging upsell. If your restaurant doesn’t have distinct menu categories, then focus on the items that your guests tend to order as their first course.

Drinks make for great discounts
Drinks have the privilege of falling in both of the above categories. Cocktails should take the reins for discounted drinks, unless you need to unload some wine/beer inventory. Discounted drinks will also encourage more guests to order more discounted drinks, which will likely lead to increased food consumption [or at least susceptibility to ordering more expensive items], leading to larger average checks.

Start with happy hours
Before rolling out a full-fledged discount program, try offering a happy hour and/or reverse happy hour, where discounts take place after the dinner rush. This method can help you achieve your revenue goals without offsetting your standard menu prices, not to mention make better use of your real estate during operating hours. Granted there will be some cannibalization of customers who will go to your happy hour instead of your dinner period, but monitor your overall lift to determine whether the increased volume makes up for any losses over time.

Make your discounts limited-time
If you’re discounting during standard meal times, be sure to sell them with a sense of urgency. Guests that know your discounts will only take place for a limited time will be more likely to walk in at a given time, and more likely try to sneak in another visit before the discount expires. This will also give your loyalists a better reason to bring their friends in to visit.

As an additional note, this tactic is also used for special menu offerings, such as Red Lobster’s Endless Shrimp and McDonald’s McRib, which brings a volume lift during otherwise low seasons.

While discounts can certainly work to your advantage, they will only contribute to long-term growth if executed strategically and monitored with great care. Remember, discounted items cut directly into your margins, so they can’t serve as a permanent solution to any kind of volume trouble you may be experiencing. There’s a lot of marketing tactics out there that don’t tie directly to pricing, so be sure to keep yourself open to a variety of possible approaches.

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