Why Discounting Your Price is a Stupid Strategy

 

The argument is about as old as the oldest profession.

You know the argument I’m talking about.  It’s the one where the salesperson argues they could close more sales if only they could discount the price.

In fact, I contend it’s more than an argument – it’s a disease that inflicts a high number of salespeople.

I call it a disease, because in their mind they completely believe that the only way to close more sales is by cutting the price.

It’s time we put the argument to rest once and for all. The best way to do it is by walking through the mechanics of discounting and the impact it has.

If you’re a sales manager reading this, take note – you can use these exact same steps with your salespeople the next time they challenge you.  If you’re a salesperson, read it closely. Then put on your “big boy” pants and realize it’s “game over” with the argument.

Step 1:

Do you believe you could grow your sales by 50% if you were to offer a 10% discount to your customers?  I don’t know about you, but when I ask salespeople this question, the answer is always “no.”   After they say “no,” they will then bring up how the question just isn’t accurate.

Step 2:

The question is accurate and here’s why.  Assume your profit is 20% on everything you sell.  (You only have to look at company P&Ls to know 20% is being generous.  Most companies have a profit margin far less than 20%.)

Don’t let someone say you can’t look at just profit and that you have to look at total revenue or “variable profit” or any number of other things.  Sorry, these don’t work and here’s why.  Total revenue is built on the total costs, so discounting a price doesn’t impact cost; it only impacts what’s left over after you account for all costs/expenses.

Argument of “variable profit” is only slightly valid, but remember that variable profit is the amount left over that needs to cover a whole host of other expenses, typically fixed costs.  Thus, cutting price winds up reducing the amount of variable profit with which you have to work.

Step 3:

If the profit margin is 20%, then a 10% reduction in price reduces the profit margin to 10%.   If the profit margin is now 10% rather than 20%, it means if you want to make the same number of dollars, then you would have to sell 50% more.

If you are only making 10% profit and you think you’re making a smart decision by offering a customer a 10% reduction in price, it would have been smarter for you to not get out of bed, as you cut your profit to zero.  Go ahead, I’ll let you be the one to share with your banker, shareholders, and others that your business isn’t making any money on what you’re selling.

Step 4:

Don’t fall for the follow-up argument about how it makes sense to offer a discount now to be able to get more business from the customer down the road.  How long of a road are you on?

Once a discount is offered to a customer, they aren’t going to be anxious to give it up.  Would you?  Put yourself in their shoes. You’re buying something at a discounted price and then you wan to buy more.  Wouldn’t you feel you deserve the same low price, because if that’s what they sold it to you once, then they can do it again, right?

Summary:

The solution to the argument of discounting the price comes down to one simple realization.  The salesperson has not done their job in demonstrating to the customer the full value of what it is they can provide the customer.

If the customer feels the price is too high, then it’s the salesperson who is setting their value bar too low.

Copyright 2014, 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

Share This Post
Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn

Recent Post

Yes! I want a "Weekly Sales Tip"

Leave a Comment

Your email address will not be published. Required fields are marked *