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.

Brought to you by Robert Clay - Visit Website

Robert Clay is an entrepreneur and marketer who has been growing businesses since age 19. He has studied and mastered more than 200 of the world’s most successful marketing strategies, building-up an unprecedented 1.8 million page knowledgebase. For a decade he conducted an experiment which transformed the thinking of hundreds of entrepreneurs, and has now launched an extraordinary new program that helps aspiring market leaders to create breakthrough marketing results.

If you’ve enjoyed this post and want to be notified when other new articles come up, just click here. To get your free copy of Robert's well regarded book “Learn how to grow your business … in just two hours: An introduction to low risk/high-return marketing strategies that will help you transform your business”, click here. If you would like to share any of your personal experiences, observations or the results you’ve achieved using these or similar tips, please leave your comments and/or thoughts below. We always love to hear from you:

Move upmarket if you want to become more successful. Not so long ago Tesco was regarded as a downmarket “Pile ’em high, sell ’em cheap?” outfit, writes Robert Clay of Marketing Wizdom. I know people who wouldn’t have been seen dead going into a Tesco supermarket. If they HAD to go into one they’d park well out of sight and would make sure nobody they knew would see them there.

How things have changed! Chief Executive Terry Leahy, orchestrated Tesco’s move upmarket, and the purpose of company was expressed as “Creating value for customers and earning their lifetime loyalty by understanding them better than anyone else.” That’s exactly what Tesco have done so well, and their growth, success and market dominance are now legendary. In Britain one in every eight pounds spent at retail is spent with Tesco, and they’ve become the benchmark for retailing success. What an astounding accomplishment in just a few short years!

Had Tesco remained a downmarket operator, it would have been impossible for them to approach their current levels of success. Their success would more likely have paralleled the likes of Kwik Save, who barely manage to survive today and aren’t even on the radar of most shoppers … because people don’t want to be perceived as cheapskates.

The German retailer Aldi, who are extremely successful in many other countries, developed a cheap and cheerless image in the UK and have admitted that by aiming too far downmarket they got things wrong for their first ten years. They’re now working very hard to turn their fortunes around in an attempt to attract a more upmarket customer and double their market share. Some stores have been relocated to more salubrious areas; they have completely overhauled their grocery lines … and their efforts are now starting to pay off.

Moving upmarket is the key to Aldi becoming more successful in the UK, just as it was one of the best things that Tesco ever did. By doing what they do very well, customers flocked to them from every segment of the market, and Tesco rapidly overtook all of its rivals to dominate its industry. And now it is proliferating around the globe.

So here’s what you should consider: Is there a more sophisticated or affluent part of your market beyond that you already currently cater to? Could you move any of your products or services further upmarket? Are there different segments of the marketplace that no one else is addressing? Could you offer similar products and services under different labels with different positioning to appeal to different segments of the market?

If you can answer “yes” to any of these questions and as long as you’re also very good at what you do, then you should seriously consider moving all or part of your business further upmarket to cater for these more affluent, less price sensitive buyers.

But won’t you lose your existing customers? Far from it! When you move further upmarket, your existing customers, just like Tesco’s original customers, will start to appreciate and value you much more highly than they did before. By moving upmarket, Tesco kept it’s existing customers, and at the same time added tens of millions of new ones. And you can too, even in a small business that decides to go further upmarket.

Moving further upmarket increases the perceived value of your product or service and people who never noticed you before will start noticing you and doing business with you, because they now believe you have what it takes. In contrast, by catering to the lower end of the market, the majority of buyers just assume you can’t be any good and choose to stay away.

Tesco’s business purpose, which steers them through everything they do, has resulted in a proposition that appeals to every segment of the market. They’ve developed their product ranges to appeal to shoppers across the board. Their “Value” range appeals to the bargain hunters, and can’t be beaten on price. Their mid range includes Tesco branded items and all the other mainstream brands. Their “Finest” range is a lot more expensive and appeals to the top end of the market.

They’ve also developed several different store formats to cater to different shopping habits and requirements. Today you can shop at a Tesco filling station, some of which carry no grocery products at all. You can shop at a Tesco Metro in our biggest cities. You can shop at Tesco Express convenience stores throughout the UK. You can shop in Tesco supermarkets. You can also shop in an increasing number of Tesco Extra hypermarkets. And if that’s not enough, you can shop with Tesco Online, the world’s most successful online grocery retailer. Go to Central Europe and you can even shop in Tesco Department Stores.

The result is that Tesco now caters very successfully to virtually every part of the market. Their sales in 2006 were £43.1 billion, 16.5% up on the previous year and they are now expanding rapidly in markets that represent more than half of the world’s wealth. Not bad for a company that would have been stuck at the bottom end of the market going nowhere if they’d stayed as they originally were.

The Mini is another product that has benefited massively by going upmarket. The original Mini was marketed as an entry level vehicle by BMC and its many successors. It never made a profit. When BMW took over they decided to turn it into a premium vehicle and proved that small pricey cars can be highly profitable … and extremely successful, even though it typically costs 50 percent more than the larger Ford Fiesta and Vauxhall/Opel Corsa, can only seat two people in comfort, and has minimal luggage space.

Tick enough options boxes and you can easily spend £20,000 on a Mini. The average Mini buyer spends £2,000 on accessories to dress it up … well beyond what BMW had expected. It also hadn’t expected the midrange Cooper model to be its biggest seller, or that the top of the range Cooper S would sell as well as the basic Mini One.

Originally BMW expected to produce 100,000 cars a year, but is now building 280,000 Mini’s a year and it’s Oxford production plant is working at full capacity. A car that was expected to produce a tiny profit margin has turned into an amazing success story that contributes substantially to BMW’s profits, despite being built by an expensive labour force in an expensive country using a unique and expensive platform.

Had BMW created an inexpensive econobox in the mould of the original mini, as British Leyland tried to do with the late unloved Metro, it is inconceivable that Mini would have enjoyed the success achieved by today’s much more upmarket and aspirational product. As well as collecting fans all over the world, today’s Mini is one of the cars to be seen in the world’s most fashionable hotspots, from the Ginza in Tokyo to Fifth Avenue in glitzy New York to the Champs Elysées in Paris to Sandbanks on England’s South Coast.

Mini’s guardians at BMW, already laughing all the way to the bank, are now planning to stretch their small-car, big-cash premium strategy to extraordinary new heights. The first step was the launch of the Mini Clubman estate then, in small numbers, an all-electric mini, soon to be followed, it is reliably rumoured, by a Mini 4×4 a new smaller mini-Mini, and even a 2-seater Mini roadster. All of them will be upmarket, aspirational, and make BMW a mint.

The point is, if you move your products further upmarket, there’s a good chance that you’ll increase demand, not decrease it. You’ll keep your existing customers who will appreciate you even more. And you’ll significantly increase your revenues and your profits.

To do this in your business, you have to be very good at what you do; you have to know and believe that what you offer is outstanding; And you have to respect your customers at the highest level.

Brought to you by Robert Clay - Visit Website

Robert Clay is an entrepreneur and marketer who has been growing businesses since age 19. He has studied and mastered more than 200 of the world’s most successful marketing strategies, building-up an unprecedented 1.8 million page knowledgebase. For a decade he conducted an experiment which transformed the thinking of hundreds of entrepreneurs, and has now launched an extraordinary new program that helps aspiring market leaders to create breakthrough marketing results.

If you’ve enjoyed this post and want to be notified when other new articles come up, just click here. To get your free copy of Robert's well regarded book “Learn how to grow your business … in just two hours: An introduction to low risk/high-return marketing strategies that will help you transform your business”, click here. If you would like to share any of your personal experiences, observations or the results you’ve achieved using these or similar tips, please leave your comments and/or thoughts below. We always love to hear from you: