Discounting can kill your business. Few business leaders or entrepreneurs realise that the biggest cost in their business can be something that doesn’t even show up in their accounts, writes Robert Clay of Marketing Wizdom. It’s the cost of giving discounts.
When you’re doing a lot less business than you should be doing, or you’re failing to hit your targets, or you’re under-utilising your potential or your capacity or you’re failing to fully exploit your investment in products, services, stock, equipment, facilities etc. it’s all too easy to push the panic button and offer discounts just to get more people through the door.
In most cases these discounts make no difference to the number of people who come through the door. But even if they do, these, or any other form of discounting, can turn into a serious and very expensive mistake. Let’s examine the dynamics …
If you have a 20% gross margin now, and you’re tempted to discount by 10%, you’ll have to DOUBLE your sales just to stand still. If you have a 30% margin and you discount by 10% you’ll have to increase your sales by 50%. If you discount by 20%, you’ll have to TRIPLE your sales.
Yet a lot of businesses throw discounts around as if they were confetti. By doing so they jeopardise their very existence because discounts are a significant business cost in just the same way as the rent, rates, payroll and other overheads which DO show up in their accounts.
A while ago I came across a business that was having a hard time. They had already done everything they could think of to reduce costs, yet they were still struggling to make £50K profit.
The key to transforming their results lay quite simply in a number that appeared nowhere in their accounts. Their invoiced sales of £2.3 million were actually made up of £3.8 million at list price, less an average discount of 40%.
These discounts were just “given away” by their sales people, without any control or authorisation procedures, and were costing the company £1.5 million a year. To make matters worse, much of this uncontrolled hand-out was completely unnecessary.
They soon established that they could reduce their average discount by one quarter to 30% with no significant loss of customers. The considerable sum they saved in discounts gave them an immediate profit boost … and by controlling their discounts they went from profits of £50K to a much more respectable profit of nearly £450K—an instant nine-fold increase.
Do you give away unnecessary discounts in your business? If so, how much higher would your profits be if you started controlling your discounts right now?
If people come for your price, they’ll leave for someone else’s
There are certain times and situations when discounts are appropriate and can make a dramatic difference to results. But discounts are also frequently offered by rote when there is no real need for them at all. Some people just seem unable to sell their product or service without offering an enticing discount … and if that happens in your business, it’s costing you a small fortune and also cheapening your image.
By offering or giving discounts for no good reason you not only make a rod for your own back, but you can suffer many other knock on effects. Unnecessary discounts are wasteful, indiscriminate and inefficient because they reward all customers, even those who end up buying less than before.
Once a discount has been given unnecessarily, customers often expect to continue getting it for years. They will then fight tooth and nail to preserve their current discount rates, and for many of them it becomes a crusade of pride and principle.
Perhaps worse, by discounting you educate your customers to become price shoppers. And price shoppers show no loyalty. By definition, price shoppers simply don’t come for the price, then stay for your product or service. They come for the price. And when a competitor offers them a better price (bear in mind that someone somewhere will always be able to undercut you), they leave you for the price … and often never return.
Discount customers don’t buy you, or the quality of your product or service. They merely buy your price tag. They’re not loyal to people and companies; they’re loyal to price tags.
Discount customers don’t refer people to you. For one thing they rarely stay around long enough to form a proper impression of you or your product or service. For another they are not likely to be good judges of quality. If they were good judges of quality they would know that most economies are false ones, and that few people discount their product or service by choice.
It’s also hard to build a satisfying business with discount customers. They don’t value you or your product or service, and by continually trying to get you to charge less, they’re communicating that your product or service is not worth to them what it is to you. You really don’t need customers like that, but businesses take them on by the millions every day. Then they wonder why their work and their income are not more satisfying.
For every company like Wal*Mart, Costco, Dell and easyJet that succeeds with a discount strategy (aided of course by their scale of operations), a hundred others fail. Companies who discount when they shouldn’t are usually the first to die. Don’t be one of them.
For all these reasons and many more, your business should never be built on discount customers.
So what’s the answer? Charge what you’re really worth, and stick to your guns! Easy to say, but harder to do … or is it?
As long as you’re not selling a commoditised product or service, it shouldn’t be hard to charge what you’re really worth.
The key is to appreciate is that your marketplace probably doesn’t understand the value and benefits you’re offering, at the level that you do. There’s a good chance they don’t understand the implications or the impact of your product or service on their lives. Discounting for the sake of it won’t help them to understand what makes you better or different.
But educating them better than anyone else does to appreciate, value and desire your product or service, and the benefits it offers can not only entirely eliminate the need to discount, but will also allow you to charge what you’re really worth. The effect on your gross profit of putting your prices up (or reducing your discounts) can be phenomenal:
If your present margin is 30% and you raise your prices by 10%, which many of your customers probably wouldn’t even notice. You could afford to lose 25% of your business before it impacted negatively on your profits and bottom line.
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