Look, discounts by themselves may not be a problem.
Consider the case of DMart, whose entire value proposition and unique selling point is selling at highly discounted prices that are much lower than MRP. In fact, the company's aim always is to be the lowest-priced retailer in its area of operation. But to do that, DMart has optimized its supply chain and operations to an extent where it can easily afford to give those discounts without these discounts eating into its profits.
The bad kind of discounts, however, are often the ones that are slapped on to a product that isn’t selling as much as it should. Discounts offered this way directly eat into profit margins because all other costs of production and distribution do not change. They're a cosmetic change and you pay for them out of your own pocket.
As always, it depends on the consumer behaviour in the target segment and what the prevailing buying habits and expectations are. But having said that, there are many other short- and long-term downsides to offering discounts.
Discounts are lazy.
It's you essentially revealing that you aren't capable of creating any valuable product differentiation and are now banking on discounts as a last resort to give yourself an edge over your competitors.
You tend to use them as a crutch that hides a bigger product problem. And that problem will stay hidden till you keep giving exorbitant discounts, showing healthy revenue numbers, and burning money till you run out of it. Once you stop the discounts, the customers stop buying. And by then, it's too late to fix things.
Discounts send the wrong message.
When you offer a large discount, you're essentially screaming,
"Look, the best thing about my product is the discount!"
Heavy discounts put price at the centre stage for even those customers whose evaluating criteria didn't even prioritize price. You tend to mask all your product traits behind that 40% discount sticker shouting over everything else.
Discounts devalue your product.
Discounts create an expectation of future discounting.
You're essentially promoting a bad habit with your customers by setting a precedent:
"We usually have discounts on our products and you shouldn't consider buying them without a discount."
You get customers used to valuing you at a discounted rate.
Discounts make consumers question the quality of your product.
In the early stages, even if the customer doesn’t automatically value your solution as you would like, when you start to discount, it shows that you don’t really believe your value proposition either.
Prospects sense this lack of confidence and question two things: 1) Is this solution as good as I thought if they are willing to accept less? and 2) Can I really trust this person who wants me to buy it?
Some things to think about while offering discounts
If you still want to play around with discounts and see if they increase revenue considerably for them to make sense, here are some good practices:
Don't offer periodic discounts, where your customers can predict when your product is going to be at a discount next and wait for it. It delays sales and it hampers your revenues and profit margin. Instead, offer them at random times to create unexpected delight that works for you instead of working against you.
Don't offer steep discounts that make people question the quality of your product. Discounts are social proof in disguise. If you offer huge discounts, the first thought that comes to any smart consumer's mind is, “Maybe no one is buying this product, that's why they're giving such huge discounts.” Hence, keep your discounts limited to 10-15% to avoid this perception.
Offer discounts that enable usage of the product and foster habit-building. For example, giving a discount for referring customers or based on repeat usage is a much better strategy than offering blanket discounts to everyone. The former promotes brand loyalty, while the latter just erodes value.
Even when you're offering a discount, don't make it the headline. Your product proposition should come first and discounts should only be mentioned when the consumer has reached the bottom of the sales funnel, with conversion imminent. That will not only make sure that customers are buying your product for the value it creates for them, and not as "the cheapest thing I could find on the market."
Discounts are a great experiment in finding out where the product value lies. But they need to be conducted with caution as brand perception is a one-way door.
Once consumers start seeing (or rather, unseeing) your brand as some company that is known for cheap products, you will most likely never be able to regain your profit margins.
An example that comes to mind is Chik Shampoo. Being established as an economy brand, Chik couldn't upgrade itself to premium users who used products like Sunsilk and Dove. Chik tried to position Chik Satin as a premium product, but it failed.
So, keep discounts as the absolute last resort, unless you operate in an industry where discounts are a standard expectation from buyers. Because it is very hard to change a solidified public perception, and harder still if it leans towards being seen as a "cheap, value buy."