How Not to Harm Your Business When Launching Discounts

Setting a discount isn't as simple as slashing prices and watching sales rise. It’s more like solving a complex puzzle—one that involves data analysis, a deep understanding of buyer psychology, and smart timing. Relying purely on intuition or copying competitors can backfire. In this guide, we’ll look at the challenges retailers face when offering discounts, why jumping in before your competitors might hurt more than help, and why some premium brands go to extremes—like destroying unsold stock—just to avoid holding major sales.

Do All Retailers Need Discounts—and When Can They Backfire?

According to U.S.-based Gartner research, 60% of consumers say price is the most important factor when deciding what to buy. That number is even higher in some industries. In the beauty retail sector, for example, as many as 70% of shoppers are highly price-sensitive. This growing sensitivity is often fuelled by economic uncertainty and tighter household budgets.

On the surface, offering lower prices can seem like an obvious win. Global brands like Netflix have successfully used strategic pricing to gain market share. In the late 1990s, when DVD rentals were dominated by Blockbuster, the model came with late return fees and a limited catalogue. Netflix broke the mold by letting customers rent multiple DVDs at once, with no return deadlines, for under $16 a month. The average cost per film worked out to less than $1, compared to $4.99 at Blockbuster. This affordability allowed users to test the service with minimal risk—and helped Netflix overtake its biggest competitors.

But it’s not always that simple.

Nielsen data shows that roughly 60% of retail promotions fail to break even. Depending on the country and industry, promotional sales can account for anywhere from 20% to 70% of total sales. While the appeal of lower prices is clear, discounts don’t always lead to profits—and in some cases, they can damage your market position.

For example, it’s not always wise to be the first in your sector to offer discounts. In one case I observed, a company with a strong market position saw a dip in sales in 2016 and reacted by introducing 20% discounts on profitable products. While this boosted sales at first, competitors quickly responded with deeper discounts on similar products—up to 25%—on items where our company couldn't match the pricing without cutting too far into margins. As a result, our sales in that product category dropped sharply.

Discounts are also rare in the premium and luxury sectors. Here, the price tag isn’t just about the product—it reflects exclusivity, prestige, and status. Most luxury shoppers aren’t hunting for deals; they’re buying the brand’s story and image. That’s why it’s unusual to see discounts higher than 10–15% in this segment, and even those are rare. Some luxury brands go so far as to destroy unsold inventory rather than offer heavy markdowns that could tarnish the brand’s image. Interestingly, this same principle carries over to the world of premium online experiences—such as Stay Casino, where the focus is on a high-end user journey rather than deep discounts. Players are drawn in by quality, exclusivity, and curated offers instead of flashy promotions.

This behaviour aligns with the Veblen effect, where higher prices can actually increase demand for certain products. In these cases, the price itself becomes a signal of quality and exclusivity. Dropping it too much can hurt more than help.

The Veblen effect

How It Works: Take a standard designer handbag priced at $350. It’s not cheap enough to be a mainstream hit, but it’s affordable enough to catch the attention of status-conscious shoppers. Now, increase the price by nearly tenfold and you have a luxury item that appeals to a very different audience—one that values exclusivity above all. Add limited availability and the inability to buy it immediately, and you have the perfect formula for a luxury icon. That’s exactly how the Birkin bag works: highly priced, rarely available, and often with years-long waiting lists.

Price perception also varies significantly between countries—even within the same industry. In markets like Switzerland, shoppers typically don’t expect deep discounts and are willing to pay full price for quality goods. Meanwhile, in countries such as Poland or Romania, customers are more likely to delay purchases until seasonal sales events or Black Friday, where bigger discounts are anticipated.

The Challenges Retailers Face When Setting Prices and Discounts

1. In Highly Competitive Segments, Matching Competitor Prices Is Essential—But Risky

In sectors like consumer electronics or hygiene products, staying competitive often means constantly matching or undercutting rival prices. To keep up, many retailers use specialised software that automatically scans competitors' websites—known as web parsers—to collect pricing and promotional data on matching products.

This helps businesses make data-driven decisions and quickly adjust their own prices and discounts. But it’s not without pitfalls.

Competitors often know when these scans take place—typically between 2am and 5am—and they may use this to their advantage. Some deliberately launch massive short-term discounts (up to 80%) during this window, only to remove or significantly reduce them before regular customers wake up.

A less cautious retailer might collect this temporary discount data and apply it as-is on their own site, assuming it's a daily or long-term promotion. The result? They end up offering 80% off all day, while their competitor quietly pulls back to a 40% discount or even no discount at all. The business that copied the deeper discount loses out heavily on margin—and reputation.

How to Avoid These Price Traps

The key is to look beyond surface-level pricing data. Don’t rely solely on snapshots of competitor discounts. Consider the full picture:

• Inventory matters: If your competitor runs a promotion and you have plenty of stock, you might consider matching the price to accelerate turnover.
  
  
• Timing is critical: If your stock is limited or you’re not under pressure to sell fast, wait. Discounts can be far more effective when the competition runs out of supply.
  
  
• Stay strategic: Monitor not just pricing but stock levels, seasonal trends, and customer demand before launching any markdown.
  
  

Being reactive without context can damage your brand and profits. Thoughtful pricing, on the other hand, strengthens your long-term position—especially in price-sensitive markets.

2. Consumers Now Expect Personalised Offers—But It’s Not Always That Simple

Customers today, especially in B2B, expect tailored experiences. They want discount codes and promotions that are relevant to their purchase history. On the surface, this seems like a win-win: the buyer feels valued, and the company drives more sales.

But there are a few challenges hiding beneath the surface:

• Word gets around: Customers talk to each other. One client who gets a special loyalty discount may tell another who didn’t—and suddenly you’re dealing with awkward conversations and potentially damaged trust.
  
  
• Legal restrictions: In some countries, personalising discounts based on consumer behaviour is heavily regulated. Directives like the Price Indication Directive or Unfair Commercial Practices Directive (particularly strict in countries like Poland) can make targeted offers nearly impossible to implement legally.
  
  
• Technical complexity: True personalisation requires real-time data analysis. That means hiring trained specialists and investing in costly software capable of tracking customer behaviour and delivering dynamic offers.
  
  

So what can businesses do to meet customer expectations while staying compliant and cost-effective?

Smart Ways to Offer Personalised Discounts

One simple approach is to roll out a loyalty programme. This avoids regulatory grey areas and rewards customers for sticking with your brand. A good example is Starbucks Rewards. With over 34 million registered members, the programme drives about 40% of Starbucks' total revenue. Customers earn points for purchases, which can be redeemed for drinks or food.

Another option is gamification—for example, a "Spin the Wheel" game where users can win different types of rewards. You can also tie discount levels to customer spending: the more they shop, the better their rewards.

Where legally allowed, personalised pricing based on browsing and purchase history can also work well. With the right software, businesses can track which products or categories a customer interacts with most, and offer small but effective discounts on those specific items. It feels tailored—and can drive conversions without undermining your margins.

3. Tiny Discounts Often Fail to Drive Sales

If your business doesn’t have the budget for competitive offers, it’s better to skip the discount altogether than to throw in token 5% reductions. Especially during major shopping events like Black Friday, such small discounts are barely noticed—and may actually frustrate customers who expected more.

A smarter move is to offer perceived value. For example, free shipping is often far more attractive than a minor price cut. A ₴150 discount on a ₴5,000 item might not seem like much, but free delivery—even if it’s worth the same or less—feels like a better deal to most shoppers.

Focus on benefits that customers actually care about, not just shaving a few points off the price tag.

4. The Challenge of Minimising Losses from Promotions

Promotions and discounts are essential for driving sales—it’s a fact. But the real challenge lies in understanding their actual impact and avoiding unnecessary losses. So how do you calculate the return on investment (ROI) from a promotion, and how do you stop a seemingly great discount from eating into your profits?

Most retailers approach this by comparing sales before and during a promotional period. Say sales jump 200% during a discount. Great—so let’s do that again, right?

Not so fast.

What often gets missed are the side effects that hurt long-term profits:

Cannibalisation

This is when a discounted product eats into the sales of similar, full-priced products. For instance, imagine a 50g pack of nuts sold at full price, and a 100g pack of the same brand being offered at 50% off. Naturally, most people will grab the bigger, discounted pack—even if they would’ve happily bought the smaller one before. On the surface, you're selling more. But in reality, you’ve just shifted demand away from a product that would’ve brought in more margin.

To understand if your promotion truly worked, you need to analyse the combined profits of both products, not just the one on offer.

Post-Promo Drop-Off

Let’s say you run a discount on something people buy regularly—like milk or toilet paper. The promotion drives a big spike in sales. Customers stock up, and the store looks like it’s booming.

But what happens next week? Nothing. The customer doesn’t return, because they already have what they need. Sales drop off, and the business suffers in the long run. The promotion pulled forward future demand instead of generating new purchases.

Look Beyond the Sale Window

The real test of a successful promotion is not what happens during Black Friday—it’s what happens after. Are your profits over the next quarter higher than last year’s? Did the promotion help retain customers, or just bring in deal-hunters?

Getting this analysis right takes effort. There are complex, layered formulas (we’ll explore these in the course), but even without advanced maths, the key idea is simple: don’t chase short-term wins at the expense of long-term value.

Discounts alone won’t keep customers loyal. You need to solve real problems. Maybe you have great pricing and an excellent loyalty scheme—but if a customer wears size 13 shoes and can never find a pair that fits, none of that matters.