Coles recently reported supermarket gross margins rising from 27.1 per cent to 27.8 per cent, while announcing that promotions will become fewer but “bigger and bolder.”At the same time, the retailer is defending itself in Federal Court over allegations that some “Down Down” discounts misled customers about the size of the saving. The situation offers a timely discount pricing strategy example that many businesses should examine closely.
Discount pricing remains one of the most widely used commercial tactics in retail. However, when the mechanics behind a discount become unclear, the strategy can quickly undermine credibility. For businesses watching this case unfold, the real issue is not only regulatory risk but also how discount pricing shapes customer trust and value perception.
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A Real Discount Pricing Strategy Example: The Coles Promotion Model
Australian grocery retail has long relied on high–low promotional pricing. Retailers maintain regular prices and then run temporary discounts through catalogue campaigns, shelf labels, and promotional events to drive traffic and basket size. This approach creates urgency and encourages customers to purchase more items during promotional periods.
The Coles “Down Down” campaign has operated within this high-visibility promotional model for years. Bright red discount labels signal savings and reinforce the perception that prices are falling across the store. However, the current legal dispute highlights concerns about how reference prices are set and communicated to shoppers.
In this discount pricing strategy example, the tension comes from three factors appearing together. Promotions remain highly visible, supermarket margins are increasing, and regulators are questioning how discounts are structured. When these elements combine, the credibility of the entire discount pricing strategy becomes vulnerable.
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Example Why a Discount Pricing Strategy Backfire
Discount pricing works because it sends a simple and powerful signal: the customer is saving money. Shoppers compare the promotional price to a reference price, which acts as a mental benchmark for what the product normally costs. If the difference feels genuine and consistent, the offer appears valuable and encourages purchase.
However, the strategy begins to weaken when reference prices become unclear or inconsistent. If a “was” price existed only briefly or appears inflated, the saving may feel artificial even if it technically complies with pricing rules. At that point, customers begin questioning the credibility of the promotion rather than responding to it.
This is why discount pricing can backfire even when sales remain strong. Frequent promotions can condition customers to wait for discounts rather than buying at regular price. Over time, the discount stops communicating value and instead signals pricing complexity or manipulation.
For retailers, the real risk is not simply regulatory action. The greater risk is that customers start believing the original price was never real in the first place.
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AI and the Next Evolution of Discount Pricing
Coles has indicated that AI will increasingly shape its promotional strategy, targeting discounts across customer groups and the overall shopping basket. From an operational perspective, this makes sense. Targeted promotions can reduce blanket discounting, improve promotional efficiency, and increase the return on promotion spend.
Many retailers are now exploring algorithm-driven pricing systems to refine promotional decisions. Data can reveal which customers respond to certain discounts, which products drive basket growth, and which promotions generate long-term loyalty. In theory, this allows retailers to move away from broad catalogue discounts and toward more precise pricing interventions.
However, technology introduces another layer of risk. Algorithms optimise what they are designed to optimise. If the system focuses primarily on protecting margins, it will improve margins. If it focuses on improving affordability and value perception, it may strengthen customer trust.
Technology, therefore, does not solve weak pricing governance. It simply scales whatever pricing logic already exists.
The Real Test: Customer Value Perception
Ultimately, retail pricing is judged at the checkout. Customers do not see algorithms, pricing models, or promotional rules. They only see the total cost of their weekly shop, which becomes the real measure of whether pricing feels fair.
This is why reducing promotional frequency can significantly change how value is experienced. Australian grocery shoppers have become accustomed to catalogue-driven discounts and promotional cycles that help them manage weekly spending. When those promotions change or become less visible, customers may feel that prices are rising even if overall pricing remains stable.
In this environment, trust becomes the central pricing asset. If customers believe the retailer is offering genuine value, targeted promotions and AI-driven pricing may work. However, if grocery bills continue to rise while discounts appear less transparent, the entire pricing strategy will face resistance.
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The Strategic Lesson for Retailers
This discount pricing strategy example shows how quickly promotional tactics can become strategic risks. Discounting remains a powerful tool for driving sales and signalling value. Yet when the mechanics behind discounts become complex or unclear, the strategy stops reinforcing trust and begins inviting scepticism.
Retailers across many sectors are now exploring AI-driven pricing, targeted promotions, and fewer blanket discounts. These tools can improve efficiency and strengthen pricing discipline. However, they also increase the need for clear governance and transparent pricing rules.
Because technology can optimise pricing execution. It cannot replace pricing integrity.
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What Executives and Pricing Teams Should Do Next
Executives must review discount frameworks and ensure they reinforce genuine customer value. Technology can support pricing decisions. However, long-term trust depends on transparent and defensible pricing structures.
Pricing teams should audit reference prices, tighten promotional governance, and ensure every discount can withstand regulatory and customer scrutiny. Data and automation will shape the future of pricing. Yet strong human pricing judgement remains essential.
If this topic reflects challenges in your organisation, let’s talk. Reach out to our team and explore how a stronger pricing strategy and organisational capability can support your next phase of growth.
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