Do Major Holiday Discounts Help or Hurt Your Business? Discounting can be a great way to drive revenues, but it can also kill your profits. Here's how to determine whether discounting will help or hurt your business.

What is it about Memorial Day, July 4^th, Labor Day and the Christmas season? They bring out all the big discounts, which get shoppers flooding the malls to save money, especially on big-ticket items like cars and mattresses, for example.

The sellers of those products offer their best prices during these holiday seasons, trying to capture as much market share as possible from their competitors. But the question I ask is: why?

Yes, you are driving more revenues, with the holidays often representing 30% of their total annual volume. But if you are sacrificing material bottom-line profits by slashing prices in the process, why play that game?

This article will explore whether you should deeply discount your products during the holiday season or in general.

The psyche of the typical consumer

Before addressing this topic, it is important to understand the psyche of the typical consumer. Throughout the generations of shopping, retailers have trained consumers to expect certain behaviors, including when to expect discounts.

One example worth calling out is J.C. Penney. J.C. Penney was one of the most successful retailers in history, commanding a dominant market share at their peak. However, retailers like Kohl's and Target started to take market share away through better quality products and better prices. Kohl's was particularly effective with their Kohl's Cash, which would give the consumer credit on their next order while they were checking out on their current order, giving the customer a reason to return to the store for another purchase before losing their cash.

J.C. Penney tried to combat this and save their company with an "everyday low prices" approach, getting rid of discounts altogether. But that strategy did not work. Consumers were simply too trained by the other retailers to look for deals that they only shopped from the stores offering them, even if the net prices of the products were the same.

This "no discounting" strategy may work well for a high-end brand like Nordstrom, serving an affluent demographic that is less price-conscious. But it does not work well for penny-pinching, mainstream consumers.

So, the point here is that discounts definitely play a major role in the psyche of the mainstream consumer, and you need to decide when and how best to use them.

Related: How Promotional Pricing Devalues Your Brand

The typical economics of a holiday sale

Let's look at the mattress industry, for example, which runs heavily discounted promotions during each major holiday season. Let's say the average mattress costs $1,000 at regular prices. During the holiday sales, that price drops to $750 (25% off).

Let's say a mattress seller is making $100MM in revenues per year, with 30% of their annual sales happening during holidays. That means their typical gross profit margin of 50% may drop to 25% during the holiday sales. And their net income margin may drop from 20% to -5% during the holiday sales.

What that suggests is that $70MM of their revenues at full price are driving $14MM in bottom line profit, and $30MM of their revenues at the discounted price are driving a $1.5MM loss, for a total net income for the year of $12.5MM (a 12.5% blended profit margin).

My initial reaction

I feel we, as businesspersons, are so focused on scaling revenues and market share that we don't put enough thought behind "at what cost" when those revenues come.

I could be perfectly happy not to participate in the discounting seasons. Yes, I would end up with a much smaller revenue business, leaving 30% of potential revenues "off the table." However, my bottom-line net income and profits margin would actually have been $1.5MM higher if I had not "given the product away" at deeply discounted prices.

The point here is that just because everyone else is doing it doesn't mean you have to do it too, as profits may be a much better metric to maximize than revenues, depending on your goals.

What you risk by not discounting

Profits are not the only metric you need to concern yourself with. Not participating in the holiday discounting seasons may have some downside risks.

That includes: (i) certain individuals cannot afford your full price and can only afford your discounted price, so you are consciously leaving that demographic unserved; (ii) by not getting your brand name front-and-center during the holiday sales, your competitors are getting more "mind share" of leading brands in the industry, potentially leaving your future brand awareness in the rear-view mirror; and (iii) you are not taking into consideration the lifetime value of the consumer.

Yes, you lost money on the first sale, but you will make it back with their customer loyalty on the second, third and fourth sales. Many major retailers just swallow the bitter discounting pill for reasons like these.

Related: I Wish I Knew This About Google Before Trying My Growth Strategy

Concluding thoughts

So, the real question here is: Should you or should you not be heavily discounting your products during the holiday season?

I think the answer to that question largely depends on the market you are serving and what your competitors are doing. If you are a high-ticket product, discounts can be very helpful in acquiring customers that would otherwise have been lost.

But if you are a high-end brand where customers are less price-sensitive, they would most likely have purchased at a higher price. To me, discounting is a tool you can use to clear out distressed inventory. But it should not be a tool you use to capture market share at all costs.

Sometimes, it is better to stay out of that battle and live to fight another day at much higher profits. That said, if you are a high repeat purchase product, acquiring customers at a deeply discounted price can be a great way to accelerate longer-term revenues and profits through repeat sales from those customers. Good luck making the right decision for your business. It will come down to which metric is most important to your business — near-term revenues or profits or long-term revenues or profits.