The Hidden Costs of Discounts

Why we don’t discount on President’s Day, Memorial Day, Black Friday or any day of the year.

On December first of last year, Tuft & Needle recorded the highest sales day ever in its history. This occurred despite the fact that nothing had changed from the day before.

For those of you that don’t have your calendar open, December 1st was a Monday. More specifically, it was Cyber Monday. A day that almost all retailers with an online presence run some kind of promotion or special offer to their customers.

Last week, our marketing team gathered for its weekly meeting. Among the topics of discussion were designs for new billboards, potential partnerships with radio hosts and plans outlining new initiatives for the months ahead. What the team didn’t discuss, was what discounts or special prices we might offer on Cyber Monday.

At Tuft & Needle, we’ve decided against having a promotion on Cyber Monday. In fact, we don’t discount any day of the year. In the mattress industry there are sales almost every day of the week, especially around the holidays. “Lowest Prices of the Season Sale” or “Black Friday Door-busters,” you’ve seen them all… Most mattress retailers report an outsized amount of sales occurring during these promotional periods.

Before I explain why we’ve decided against it, let’s dive deep into what promotions and discounts really are.

How discounts work

The idea behind a discount on the surface is rather simple. Something that previously cost $500 is now on sale for $400. The consumer has saved $100 over what they would have paid. Promotions exist to create a perception that customers are saving money.

Why do companies charge different prices to different customers? It’s based on the idea that the customer that paid $400 wouldn’t have purchased if they had to pay $500. This is all based on the theory that a customer who thinks they are getting a deal is more likely to buy.

Cyber Monday

This coming Monday is the largest day of sales all year for online retailers. It is also the day that our company, Tuft & Needle, receives the most inbound contacts from customers. These contacts will not follow a pattern similar to the other 364 days of the year.

An outsized number of the questions coming from our customers this Monday will be “what discounts are you offering today?”

This is driven in large part by retailers offering some of the steepest discounts of the year over the weekend. As the first online mattress company to sell a single mattress directly to consumers, most visitors to our website expect us to take part in Cyber Monday.

Cyber Monday last year was the largest sales day of the year at T&N. But it pales in comparison to the surge other online retailers see. Those companies can see a 15x surge in sales on Cyber Monday compared to the average of every other day of the year.

Using those figures, Tuft & Needle left as much as half a million dollars in sales on the table. For a company that did $9 million in 2014, that’s a substantial amount of money. This coming Monday, it could be well over $1.5M that we’re missing out on because we refuse to discount.

All of this brings us back to the question: why don’t we discount at Tuft & Needle?

Fairness

Tuft & Needle was started when our co-founders shared a similar, but awful experience. They were pressured into overpaying for a mattress they weren’t excited about. A lot of that pressure was due to the “overwhelming discounts” that were available.

From this experience, a decision was made to offer fair and transparent pricing. We decided that the best pricing strategy was actually rather simple:

Every customer should pay the same price for the same products.

When customers pay different prices for the same product, one group of people are subsidizing the discounts for another.

In some industries, the idea of a discount is fair. Take apparel for instance. Customers pay a premium to have trendy styles before everyone else.

At T&N, we don’t face the same challenges. We sell the same product every day of the year. We are never “stuck” with inventory that we need to move.

If we were to offer discounts, it would be for the sole purpose of increasing sales. For the record, we’d love to increase sales. But adhering to the core values of our brand takes the highest priority.

Empathy

As I mentioned before, this isn’t an easy decision to make. It goes against the conventional wisdom that you can drive incremental sales by charging the right price to the right person at the right time.

Still, this idea doesn’t sit well with us.

One of the key virtues we seek in all of Tuft & Needle’s employees is empathy. When we put ourselves in the shoes of our customers, discounts didn’t feel right.

How would we feel if we bought a mattress, and then drove by the store a week later to see 30% off all products? How would we feel if we needed a new bed in October, but knew that if we waited until the end of November, there would probably be a deal? How would we feel if a friend told us they bought a T&N mattress for $600 but when we went to the store, we had to pay $700?

In thinking about all of these scenarios, we realize there is a simple way to remove these concerns. We wouldn’t offer a discount to anyone. We would charge our customers the same price. 365 days a year.

Hidden Costs

So what are the hidden costs of sales?

For starters, the idea of 15x surge in revenue on a single day can be viewed through more than one lens. On one hand, you can drive a large amount of sales. But an increase in sales can cause problems and added expenses. How does a company scale the customer service and operations needs without hiring 15x more people for just one day?

Around October of every year, you can see signs of these challenges all around us. Brands are forced to hire “seasonal” or “temporary” workers for the surge in retail that occurs in the fourth quarter of the year. These individuals are often employed just for the season and aren’t trained as well as your permanent customer experience team members.

There are other hidden expenses. Customers who buy based on referral, are less likely to return the product and more likely to tell their friends. When you attract new customers via discounting, there is a risk that they are less excited about the brand. They are more likely to return your product increasing your costs even further.

We see discounts as a manipulation. We feel as though we’d be tricking customers into buying a mattress. We want customers to purchase a mattress whenever they are ready to buy. When a customer buys a mattress, they are buying a product that will last at least 10 years. We want to earn their loyalty throughout that entire period of time, not just at the point of sale.

But maybe the most important reason to avoid discounts is employee morale. Discount related customer contacts are the least “fun” cases to handle. They can also get complicated when you try to explain to customers why they aren’t eligible for a certain promotion. We’d rather have our team educating consumers about the benefits of our product and who we are as a brand.

In the end, discounts may drive revenue, but they also increase your costs in hidden ways.

So does it work at Tuft & Needle?

When most customers write to us asking for a discount, we again put ourselves in their shoes. We, as consumers have been trained by other companies to ask for a discount. So we don’t take offense when someone asks for one. We take it as an opportunity to share our company value around the issue.

When we explain our reasoning for not offering discounts, most customers accept the ideas as fair. Very few leave our website frustrated.

It helps that the majority of our competitors charge anywhere from 30% to 900% more than we do, despite the fact our costs are the same.

Strategy

It’s hard to tell what pricing strategy each company you interact with has adopted. It could be arbitrary. It could be based on what customers have been willing to pay historically.

At T&N, we’ve adopted a pricing strategy of fairness. This means we charge enough money to cover our costs, pay our employees well and allow our company to grow. We’ve actually put this fairness strategy to work multiple times in the company’s history.

In February of 2014, we also listened to feedback from our customers that our prices which ended in $99 were misleading. We promptly acted on that feedback.

In November of 2014, we actually increased our prices. When we created our new foam last year, we were presented with a major challenge. This new foam cost over three times more to manufacture than our current foam. Again, we increased our prices using our values. We increased prices enough to cover our new costs.

Many customers called in asking for the old price but we refused to offer the old pricing to customers who were getting the new bed. Would it be fair to someone who got the old version of our bed, to have paid the same as someone who got a newer model? Would it be fair to all of the other people who were paying the new price for the new model?

Finally, in September of last year, we decided to end our referral program. The biggest source of growth the company had experienced in 2014.

All of this has informed our ultimate pricing strategy:

We charge what we need to, not what we can.

Black Friday 2017

We started Tuft & Needle to transform the mattress industry for the better. Amongst many problems we set out to solve, one of the main items on our “hate list” was fake sales. We found that traditional mattress stores artificially inflate prices just so they can turn around and run a “sale” every other weekend, pocketing the profits and creating no real value for the consumer.

As an obvious start, we eliminated discounts completely. Customers get the same price all year round, whenever they were ready to purchase.

But we’re a company that questions not only the industry’s assumptions, but our own assumptions as well. Even something we’ve practiced since the beginning shouldn’t be set in stone or off-limits.

As our brand and the “bed-in-a-box” category that we catalyzed have grown over the years, more and more of our customers have been asking what kind of deal we’re offering for Black Friday. This year, as a team, we revisited this topic of sales and promotions and decided to approach the subject with an open mind.

This year, we’re offering a true discount off an already fair and honest price. We are excited for our experiment on Black Friday and we’re proud to challenge ourselves this holiday season while maintaining our award-winning customer support.

From our Tuft & Needle family to yours, have a safe and happy Thanksgiving!