The True Cost of Discounting

 

discounting destroys profitSalespeople will always argue that offering a small discount doesn’t hurt and is the right thing to do for the customer.

Some salespeople will say they need a little discount to make the customer feel special or to help spur their decision to buy or any number of other reasons.

It doesn’t matter what the reason or how passionate the salesperson might feel about it, a discount is still a discount and it costs money!

Offering a 5% discount to help close a deal may seem like not much, but let’s break down the math to see just how much a 5% discount will impact the bottom-line.

For our example, we’ll use a selling price of $100.00 and the profit your company makes from each sale as $15.00 (which is 15%).   Yes, your actual profit is going to vary. Many companies are less and some might be more, but for demonstration purposes, let’s go with the $15.

Full Price

Selling Price:         $100.00
Profit:                      $ 15.00

5% Discount

Selling Price:          $100.00
5% Discount:         $     5.00
Profit:                     $   10.00

The profit made is actually reduced by 33% because of the discount.

Too many salespeople make the fatal mistake of looking at the size of the discount as a comparison to the full price, but that is a huge mistake.

A discount offered to a customer is not a discount on the full price. It’s a discount on the profit, unless there is something else of value equal to the discount that is being removed from the offer. Problem is that scenario is rarely the case.

Salespeople give discounts because they don’t feel it’s a huge concern, let alone a huge cost to their company.

When the issue of a price discount comes up, every salesperson and sales manager should frame the discount not against the selling price, but against the profit.

Let’s go back to the example used earlier. A salesperson looking for a 5% discount may not view it as an issue to their company and thus feel it’s no big deal. Now, let’s frame the discount as being a 33% discount on profit and it suddenly becomes “game over.”

If a salesperson has to ask management for permission to offer a discount, the salesperson is going to think twice about asking to cut profit by 33%.

They know asking for a 33% reduction in profit is going to come across as stupid and will ultimately imply to the sales manager that the salesperson can’t sell.

For this reason, it’s vitally important that salespeople be required to express any discount as being a discount on profit.

If you’re a sales manager who doesn’t want to reveal financials to the sales team, then just use a percent as the standard profit number. Use the 15% in the example above. This allows salespeople to understand quickly and avoids having to divulge financials.

Discounting costs far more than the typical salesperson will ever admit, and that is because they’ve been geared to think based on the full list or retail price.

Salespeople, when first challenged with framing all discounts against profit versus price, will initially argue profit is too high anyway.

Again, this is a bogus argument because profit made is a direct measurement of the success of an organization. The lower the profit, the less successful the company is, which really comes back to the sales team being unable to express the value proposition.

It’s hard to find a salesperson who is willing to admit they’re not good at what they do, but that is exactly what they’re saying when they use the argument they need a discount.

Copyright 2015, Mark Hunter “The Sales Hunter.” Sales Motivation Blog. Mark Hunter is the author of High-Profit Selling: Win the Sale Without Compromising on Price.

Click on the below book cover for more info on boosting your profits!

High-Profit Selling

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