Do discounts really build customer loyalty or improve long-term profit? 

Customers love a good discount and a lot of business leaders lean on it like a reflex. When sales are slow, they cut the price and watch people come running. BUT…does that action actually add up to sustainable financial growth or even true customer loyalty? Or are you just training your customers to wait you out? 

Let’s get in.

First of, we need to be aligned on what customer loyalty means here. I define loyalty as an ongoing relationship between an organization and its customers that inspires the customers to keep choosing the brand and even proudly recommending the brand to others.

Secondly, I want to be clear that discounts in themselves are not bad tactics, but they can be used the wrong way which ends up hurting the organization.

So let’s start by looking at the most wrong ways discounts are applied and the long-term impact they have on business growth.

Situations where discounts don’t add up 

The two classical ways are RELYING on discounts to generate sales or retain customers.

Take Teela, a fashion brand I’ve just made up to explain this. In practice, if a large percentage of all of Teela's sales come through discounts, it means Teela is:

• losing its profit margin per new customer sold to, and

• unable to cover that loss even when the customer keeps coming back to buy, since Teela is still giving discounts to retain them.

Businesses that do bi-weekly flash sales are a typical example of this. Even those that do summer, Valentines, Christmas, halloween, winter, new year, girlfriend’s day, independence day, democracy day, mother’s day, father’s day, company anniversary, founder’s birthday, etc sales are unintentionally running the organisation to a gradual decline.

You don’t need to do a discount sale for every celebration or holiday in a year! Even if you choose to offer sitewide discounts for a few celebrations, you need to be strategic about it so the business doesn’t run into a loss.

How relying on discounts for sales and customer retention hurts your business  

1. Conditioning customers to wait for price slash 

Frequently giving discounts to customers conditions them to wait you out.

It’s same behaviour people have towards brands that are big on Black Friday deals. Customers literally wait patiently for Black Friday sales before purchasing even when they can afford the items at their full price. 

In the long run, you end up with very low sales when you’re not doing discounts. Most Managers get frustrated with the low sales and decide to offer more discounts which makes customers more reluctant to buying at the actual price.

At the same time, bargain hunters become very attracted to the brand and as long as I’m concerned, having a large number of bargain hunters as part of a business's customer base is one of the worst, subtlest ways to kill a business.

2. Erosion of brand value and trust 

Consistent discounting forces customers to question the superiority of the products, especially if you're targeting high-end customers. 

Humans generally like to make things make sense. A customer might think, "Why is this brand able to offer this much discount? What do they get out of it? Did they reduce the quality to be able to offer discounts and sell out faster?"

The last question usually takes the lead for quality-conscious customers. They gradually start seeing the brand as inferior as their trust wavers, and they eventually leave or buy less.

3. Rival reaction, price war

Frequently selling at discounted rates can easily draw customers away from competing brands. When Teela runs a discount, their competitors' customers may buy heavily from during that window, meaning those customers won't need to return to their usual brand for a while. 

This causes real losses for those competing brands and may even force them to lower their own prices in response, triggering a price war. Once that happens, Teela will be pressured to keep its own prices low, or push them even lower, just to stay competitive.  

4. Shrinking profit margin

This is where things begin to get more dramatic, as Teela becomes more dependent on discounts to make sales and retain customers. First things first: discounting has an immediate impact on Teela's profit margin because it reduces the amount of revenue generated per item sold.

Of course, Teela will sell more items during a discount; however, the volume won't stop its margin from shrinking. Say Teela sells its T-shirts for $100 each with a 20% profit margin, that means Teela makes $20 per T-shirt after subtracting all expenses. If Teela offers a 10% discount, its profit margin drops significantly.

So, if Teela sells 100 T-shirts a month at $100, its margin sits at $2,000. But now Teela has to sell 200 pieces at $90 (the discount rate) just to generate that same $2,000 margin.

A lesser profit margin may not seem too bad to Teela's leadership, because they think a $10 margin per sale is okay. But increases in expenses like rent, utilities, raw materials, and labor can significantly shrink Teela's margins further. External economic factors, such as inflation, recession, and currency exchange fluctuations, can also shrink their already thin margin even more.  

5. Inability to meet expenses / cost-cutting 

Teela is now stuck in a cycle: less revenue per item sold, thinner margins, and customers who now wait for discounts instead of buying at full price. Meanwhile, Teela's own bills keep coming due. Rent and salaries need to be paid. Electricity, tools, subscriptions, and loan repayments (if any) keep rising over time with inflation and normal cost increases, regardless of how thin the margin has become.

So what leadership now has is a business bringing in less profit per sale, while its bills climb slowly. For a while, Teela can absorb this, maybe it had some savings, maybe the earlier sales volume was still strong enough to cover things. But over time, the gap between "what's coming in (profit)" and "what has to go out (expenses)" keeps widening, until eventually the margin coming in from sales isn't enough to cover Teela's fixed running costs anymore.

This is the point where Teela's leadership starts to feel stronger pressure. They may not be able to pay everyone, or pay full rent, or restock like they used to. So they take the instinctive next move, which is to cut costs, because that seems like the fastest way to protect what little cash is left.

They lay off a percentage of staff to reduce the biggest expense line, cut the pay of the staff who remain, cut back on raw material quality or buy smaller quantities (which also raises the per-unit cost, because Teela loses the bulk-buying discount), delay supplier payments, or cut corners on quality control just to keep the lights on.

Unfortunately, none of these cost-cutting decisions come without unintended consequences. Fewer staff doing the same amount of work means the remaining staff are overworked. Pay cuts on top of that lower morale even further.

Overworked, demotivated staff make more mistakes and give worse customer service. That shows up as lower product or service quality and more customer complaints. And that, in turn, damages the very thing Teela needs most right now - its ability to retain customers and attract new ones - which pushes Teela right back to the exact same starting problem it began with: low sales and low retention. Except now it's worse, because Teela is leaner, more strained, and has fewer resources to fight back with than it did the first time around.

So you see, in the long run, discounts didn't really help Teela. The exact goal Teela was trying to achieve wasn't achieved, and things actually got worse. I hope that these few points, I've been able to convince you that you can’t rely SOLELY on discounts for long term growth or customer loyalty. You can see the clip embedded above for a visual representation of this.

But as I mentioned earlier, discounts are not inherently bad tactics. The outcome you get is dependent on how you apply them.

Here are some situations where you can apply a discount and get the most out of it. 

1. Penetrating a new market segment 

If you’re planning to reach a new market segment that is saturated, you can add discounts to your overall penetration strategy to get the attention of a handful of customers. The discount is not what you would use to retain them, it’s not what you rely on to bring those customers back after their first purchase, it’s only a tactic for getting customers through the door. 

2. Appreciating old customers 

A second way to apply discounts correctly is using them to appreciate loyal customers. The aim of this discount is not to say, "Oh, we're running low on sales, please come and buy; we're reducing the amount so you can buy from us."

No. Instead, you're saying, "I see you, thank you for choosing my organization. This 20% discount is my way of saying thank you for supporting this organization."

Now the customer also realizes that you see them and value their patronage. In some cases, this triggers what people call an "overnight loyal army." It's a situation where you have been doing so many other things within your larger loyalty strategy, and the moment you offer the appreciative discount, it triggers something in customers. They begin to realize the other little things you've done very well that they never paid attention to or took for granted.

So, in turn, they become appreciative of you (your team, brand), and that inspires or influences them to be more intentional with your brand, continue coming back, and even spread the word.

Discounts used in this context contribute well to genuine loyalty. Notice that I used the word CONTRIBUTE. On its own, discounting cannot build true loyalty. But if it's applied correctly within a larger loyalty strategy, it does wonders.

3. Celebrating customers

If you keep track of things like customer birthdays or wedding anniversaries, you can offer a discount code to customers as a way of celebrating them.

Or you go the other way: instead of a discount, you give them something they'd value, for free.

Either way, it makes the customer feel seen. It shows that the business sees them as more than a transaction, and that contributes (keyword here is  CONTRIBUTES) to growing loyalty and long-term financial strength. On its own, it can’t do much, but as part of a larger loyalty strategy, it's a very good tactic to keep in your arsenal. Use sparingly though.

Side note

By now, you probably have a critical question in your head, because I mentioned earlier that discounting does impact your overall profit margin. So even if you use it for the right reasons, wouldn't it still impact your margin? Yes, it will. However, you will be able to close that gap if you apply it correctly and are not dependent on it.

When a discount is used the right way, the customer feels appreciated, feels special, and feels inspired to keep coming back to buy from you. And the next time they come back, they buy at the full price, not the one-time discount price. The more they buy from you afterward, the more you recover the cost of that one discount.

It works the same way marketing spend does. When you draw up a marketing budget and run ads to generate sales, the very first purchase a new customer makes doesn't cover your full acquisition cost. That customer usually has to buy two or three more times before you break even and recover what you spent to acquire them. The same logic applies to discounts used correctly.

In the opposite scenario where a business is fully dependent on discounts to attract sales and retain customers, it becomes almost impossible to ever recover that cost. Even if those customers keep coming back, most of the time they're still buying on discount, not full price. That's the fundamental difference.

Let's talk

If this topic resonates with you and you'd like to talk more about it, shoot me an email so we can schedule a time to chat.

When you reach out, let me know which of these you're looking for:

• An open conversation about the topic itself. No strategy or brand talk required, just an open discussion

• A conversation about your brand or business specifically

• Hands-on consulting or support: working together to realign things internally for your business

I welcome all three, and I'm happy to have these conversations with executives, team members, and team leads. Just let me know upfront which one you're after, so we can make the most of our time together.