Insight 13: Discounting Hurts you – What You Should Do to Get It Out of Your Business

We have all experienced it, gone into a store to purchase an item, happy to pay the stated price. And before we know it, the salesperson that we are dealing with states, “oh and I just put a little 10% discount on that for you.” The salesperson, ever wanting to please, wants to make us feel good about our purchase. But for me as business owner who works with business owners daily, I have to bite my tongue knowing how damaging this is to the business. Let me explain;

If we look at the image below, on the left hand side we have the normal business model, chugging away producing a profit before tax of about $100,000.

Then on the right hand side, we have the effect of a 10% discount being applied to sales.

Yes, that innocent and well-meaning gesture of a 10% discount, when applied across the entire business, will wipe out 100% of profits and you are now in danger from all sorts of forces.

As can be seen, small discounts, can have a big impact. So, what should be done?

Step 1 – A mental check.

As an individual, before you think about discounting, check-in with yourself and ask the question, who asked for this discount, was it me or the customer? If the customer didn’t mention it, then recognise that they are happy to pay full price.

Step 2 – Share with staff.

I have encountered salespeople that if given the opportunity, will continue to discount the product again and again. If given the opportunity they will actually give the product away. This is in the belief that they are making the customer happy, and the customer will return for more business, or tell their friends.

However, most salesmen don’t realise the damage they are doing, so sharing examples like the above, will open their eyes.

Step 3 – Re-engineer Staff

If you really want to get staff on board, while it can be tricky, then think about including a bonus or profit share. Not at the revenue line, but at the Gross Profit line. You may need help setting this up and extracting data from your accounting system, but this will quickly mean that your sales staff are now working for you, and themselves.

Also, provide sales training to make them better. We have all had those experiences where we have met fantastic salespeople, and regardless of what they were selling, we feel soo good about them and what we bought and we are definitely going back for more. And there isn’t a discount in site.

Step 4 – Practice Safe Discounting

In the modern era, and especially in retail trade, a discount strategy has become part of marketing strategy. Almost nightly, we see companies like Briscoes using discounting to invite people to purchase online, or even better go to one of their stores. But Briscoes have been doing it for over 20 years, and I will guarantee their discounting strategy has a number of components being;

• Starting with a higher margin, so that they can discount back to the price they want to sell out.
• A daily review of their Sales and Gross Profit numbers.
• Understanding buyer metrics– namely, if we offer a discount of x on a certain product, we get y number of people in the store, and they also purchase z of additional products at full price.

If you are going to move into this space, make sure you are across all the numbers to understand the outcome of your marketing strategy.

Step 5 – Recognise Your Value

Value is a 2 way street. If we look at the vehicle industry we see that the cost of the base model Toyota Corolla, is $38,000. Then when we look at a base model BMW 3 series, it costs $92,000. More or less, those 2 vehicles do the same job. But somewhere in there, somebody purchasing a BMW 3 sees enough value to pay more than double the price of a Toyota Corolla.

So, what is the value you provide? If you are a chemist and have eased someone’s pain or made them look better, what is the value of that? If in construction have you supplied a product quickly that allows the customer to stay on time with a building contract and receive a performance bonus.

Or, if you supply security, what is the value to your customer of them not having to worry about their premises being broken into and the associated business interruption.

If you are providing value of this nature, you don’t need to discount, the only thing you and your staff need to do is back yourself.

 

Discounting is part of many businesses, but its impacts need to be understood, and it needs to be used carefully. Before you go down that track, maybe spending some time working out the real value you provide which may give you the confidence to do things differently. You owe that to yourself!

Have fun. Quentin