When businesses hit bumps in the road, they often look to discounting as a way to generate sales. While some customers may ask or even expect them, they come at a cost – ERODING PROFIT.
When it comes to pricing, ask yourself these two questions:
- Is the discount part of a strategy to acquire new business or is it an easy way to close the sale?
- Do you find it easier to cut prices versus adding value and maintaining your price?
Discounts have been around forever – and they have their place. For example, if you wish to attract a new customer, offering a discount on the first sale – with the expectation that future sales are at your normal price – can be an effective way to remove barriers and earn the business today, and more profitable sales in the future.
However, if discounts are part of your selling strategy – they go to everyone, every time as a way to get the sale – you have now created a recipe for profit erosion. And it’s time to re-think your strategy.
Need some convincing? Start by understanding the relationship between discounts and profit. How much profit do you lose with the discount – and what percentage of the profit does this represent? For example, if your product or service has a 30% profit margin and you give a 10% discount – you lose about 33% of your available profit. Ouch!
Second, don’t assume you will make it up in volume – in most cases you won’t. Know how much additional sales you must generate to ‘replace’ the profit you lost through discounting. Here’s an example to demonstrate these two points:
Your company sells a widget for $100 each and your profit on each widget is $30.
- If your company sold 50 widgets at regular price, you would generate $5,000 in sales and $1,500 in profit.
- If you chose to sell those widgets at a 10% discount, you would generate $4,500 in sales and $1,000 in profit. Note your sales price went to $90 and your profit dropped to $20 each.
- To maintain the same $1,500 profit with a 10% discount, you would need to sell 75 widgets — a 50% increase in sales.
Try doing this same exercise for your own products or services. It may just change the way you think about discounting!
Now you may be thinking ‘But if I don’t give discounts, I’ll lose sales. In this industry, everyone does. If I don’t, they will go to competitors.’ And you may be right. You may lose a few deals or customers – but you can afford to and still make the same or more profit!
Here’s a few suggestions to help you get off the discount track:
- Develop a strong selling proposition around your strengths – and educate customers on value! If the only thing your customers value is low price, it’s time to rethink your target customers.
- Educate your team (or self) on your margins and the financial implications of discounting – do they know how much more they need to sell to replace lost profit?
- Teach your sales team to sell value – perceived or real. Too often discounts become automatic simply to close the sale
- Increase prices for select services – to offset periodic and strategic discount decisions
- Offer sales team incentives based on profit not revenue. You’ll be amazed at how quickly stop discounting when it impacts their commissions.
Your pricing strategy should support your overall revenue and profit goals. If it does not, you may wish to give your product and pricing strategy a much needed facelift – and avoid these common profit killers.
Ready to Put Your Business on the Path to Success?
Would working with a business coach help you take your business to a whole new level? Then let’s explore the possibilities with a complimentary consultation. It’s a chance to get to know each other, discuss your goals and the obstacles that hold you back. Together we can determine if there is a good fit between your needs and my services.
To learn more or schedule an appointment, call me at (856) 533-2344 or drop me an email Joan@HybridBizAdvisors.com