The forgotten cost of discounting

Oct 08, 2007

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 or facilities, it’s all too easy to push the panic button and offer discounts just to bring 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 per cent 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 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 £50,000 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 “given away” by their salespeople, 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.

The company 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 £50,000 to a much more respectable figure of nearly £450,00 – an instant ninefold increase.

Does your business give away unnecessary discounts? If so, how much higher would your profits be if you started to control 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. Some people seem unable to sell their product or service without offering an enticing discount… if that happens in your business, it’s costing you a small fortune and also cheapening your image.

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 expect to continue receiving it for years. They will then fight tooth and nail to preserve their current discount rates – for many, it becomes a crusade of pride and principle.

By discounting, you also educate your customers to become price shoppers. By definition, price shoppers simply don’t come for the price then stay for your product or service. They come for the price.

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 nor the quality of your product or service. They are loyal merely to price tags.

Discount customers don’t refer people to you. They rarely stay around long enough to form a proper impression of you or your product or service nor are they likely to be good judges of quality. If they were, 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 nor your product or service and by trying to persuade 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 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), 100 others fail. Companies which discount when they shouldn’t are usually the first to die. Don’t be one of them.

Your business should never be built on discount customers. 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 market place probably doesn’t understand as well as you do the value and benefits you’re offering. 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. However, educating them better than anyone else does to appreciate, value and desire your product or service and its benefits can not only eliminate the need to discount but will also allow you to charge what you are really worth.

The effect on your gross profit of raising your prices (or reducing your discounts) can be phenomenal. If your margin is 30pc and you raised prices by 10pc – which many of your customers probably wouldn’t even notice – you could afford to lose 25pc of your business before it impacted negatively on your profits and bottom line.

If you don’t know how to educate your clients (it’s actually very simple), give us a call and we’ll happily show you how we’ve helped hundreds of businesses to realise their true value and leave unnecessary discounting behind.

For more information, visit www.dspconnect.com

Robert Clay has been growing businesses since the age of 19. He started his first business with no capital, reaching no.3 in his field in the UK within seven years. His second business reached no.3 in Europe after three years.

After selling both businesses to one of the largest companies in Europe he was persuaded that his self-taught approach to marketing could be used to grow any business successfully.

He subsequently studied and mastered 116 of the world’s most successful business growth techniques, and since June 2000 he and his team at DSP Solutions have transformed the thinking of hundreds of smart successful business leaders by providing them with world-class knowledge of low-risk/high-return marketing strategies that really work in any business.

His new book and set of CDs, “”Learn how to grow your business … in just two hours.”” are available now for just £15 each plus £2.25 for post and packing. Order both together for just £25 plus P&P.

Call DSP now on 01908 357657 to order your copy or to arrange a free consultation.”

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