How those 50% Uber Discounts hurt Uber and Prove the Importance of Pricing.

Have you recently gotten an e-mail with this subject line: “Thanks for being on time! Here’s 50% off 10 rides”?

No? Well stop making your driver wait for you.

Over the last couple months, I have found myself waking up on Monday morning, checking my email and seeing this nice little present from Uber. Unfortunately, this “token of appreciation” is doing more harm than good for Uber. And Uber is not the only company guilty of this; companies across a variety of industries are making the same mistake.

Whether it’s 50 percent off my next 10 Ubers or my bi-weekly 40-percent-off emails from Banana Republic, companies are continuously reaching for the lowest hanging fruit (AKA easiest program to implement)in an attempt to drive in revenue, all the while killing the brand tree the fruit is grown on.

Let’s walk through the process of how this discounting approach hurts companies and their brands. For the next 10 rides, I enjoy the fruit of my promptness. Trips that would normally have cost me $20 or $25 dollars are now $10-12.50 and I feel on top of the world. But then trip 11 hits. That $10 trip is now back up to $20 bucks and I hesitate to order the car. For $10 I was willing to skip the dread of the New York City Subway, but my Uber price has just doubled, so I can take the subway or even walk…

As I refresh my Uber App hoping the price has decreased, my mind is focused on how the price of this ride was just $10 yesterday. This is what psychologists call the Anchoring Effect. When applied to this scenario, the price we initially see or become used to effects our perception of future prices. I no longer want to pay full price for an Uber that is 5 minutes away when I can walk, take the subway, or hop into one of 20 yellow cabs flying past me. Coupon discounts do something extremely similar. We can all name three to four brands we would never pay full price for because we know that if we wait a couple of days, we are guaranteed to receive a discount offer.

Discounting might drive revenue in the short term, but the long-term implications are numerous.

  1. Discounting dilutes the perception of the brand. While not all companies or brands can say they are a luxury offering, the longer the company can hold out on discounting the better, because they won’t be unnecessarily cutting into their own profit margin.
  2. Discounting trains the customer to wait for e-mails, and fails to encourage customers to proactively shop or use the company’s service during non-discounted times.
  3. It causes customers to think the company’s ‘everyday prices’ are hyper inflated to adjust for these discount and promotional offers.
  4. Ultimately the company is providing a discount on its retail price when the company could be discounting off the wholesale price (I’ll explain below)

There are two alternatives for companies like Uber to escape the discounting and anchoring traps:

  1. Switch to a model that discounts on the wholesale price of an item, rather than the retail price. Instead of giving me 50 percent off my next 10 rides, Uber (or any business) can create a digital punch card. After five, seven, or 10 rides, my next ride is free. I continue to pay full price for my rides, but there is a reward at the end. Think about your favorite frozen yogurt shop. They get me to come in 10 or 12 times before giving me my next one free (capped to a certain price, to avoid abuse of the reward). When I finally earn my free FroYo, I am getting something that cost the store almost nothing, but damn does it feel good to cash in that punch card!We can use the FroYo example to prove how a punch card approach makes a company more money. Imagine that Roy’s Yogurt sends you an email that says enjoy 20 percent off your next 10 purchases. Every time you go to Roy’s Yogurt shop you spend exactly $7 on FroYo. With that 20 percent discount applied 10 times, Roy’s $70 has now become approximately $56. If Roy had instituted some kind of punch card rewards system, he would have generated the $70 from the 10 sales and given away maybe $1 worth of wholesale cost of goods of FroYo on the 11th visit.There are numerous paths a business can take with the wholesale discount, but as long as it isn’t discounting a retail price, it is in better shape than it was before!
  2. Make the brand and company something people are willing to pay full price for. Everyone has a product or company that they are loyal to. Whether it is the quality of the product or the customer support and post-purchase love provided, people are willing to pay full price because they feel that it is worth it. Companies have to continuously strive to differentiate themselves from the competition. If not, Amazon will just gobble them up.

Ultimately, coupons and discounts are the cheap and easy trick that should be the last resort for companies and marketers. The playbook when it comes to discounting should always be the following:

  1. Build a brand people will always want to pay full price for
  2. If it comes time to discount, don’t discount the retail price; it’s better to give away an item for free and eat the wholesale cost, than it is to begin the process diluting your retail prices.

 

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