The Cost of Discount

Don't make discount your main differentiator

Photo courtesy of Christopher Sessums

“If we could just reduce the price, we can win the order.” How often have you heard (or said) this?

With very few exceptions, businesses don’t buy solely on price. And yet, generations of salespeople have trained buyers to ask for, and expect to get, a discount before they will place an order.

If it’s always been this way, why try to change it?

Profit

How are you funding the discount? – Are you reducing your costs for this particular order? Of course not, you are reducing your profit margin. If you work on a gross margin of 20% and you give a 10% discount, you’ve just reduced your profit by 50%.

“Yeah, but I got the order!” Congratulations, you. Do you want a pay rise next year? Do you want your company to develop new products? Do you want your laptop / car / mobile phone upgraded? Where do you think the money for these things comes from? It comes from the profit, which you’ve just given away. How easy was it to get that order? Now, get out there and win another one to make back that lost profit.

If you’re discounting everything at the same rate, you have to win two orders for every one forecast. That’s right, you have to double your order intake. How easy it that going to be?

Value

What message does a discount send about the value of your product?

“You were happy to sell to me at the original price but equally happy to drop the price when I asked. Were you trying to rip me off with the original price? (Are you trying to rip me off with the discounted price? Let’s push harder and see how low we can get it.)”

I don’t know who first said it but it’s one of my favourite phrases:

Perception is reality

If you are willing to drop the price,you are creating the perception that your offering isn’t as valuable as you said it was.

You will start to raise doubts in the customers mind that he is making the right decision. If you don’t value what you are offering, why should he?

Discounting also has a corrosive effect on you and your company.

The very first order placed on Arrosam was from a friend who runs a small software house. I generated the full market price for the job and then, for a variety of reasons, gave him a very large discount.

In an effort to be helpful, the first thing he said to me after reviewing the quote was “You’re not charging enough.”

Helpful, but very demoralising and demotivating. Even without him telling me, I knew I had undersold myself. He just confirmed it.

Whilst I delivered what I said I would, it was nowhere near on time. Actually, it was many months late, a fact of which I am, to this day, mortally ashamed. I didn’t value the contract or myself highly enough and, consequently, executed badly. Luckily for me, we still remain friends.

You could say that this doesn’t apply to you – your job is to win the order, it’s somebody else’s job to deliver it. That may be true but how do your colleagues perceive you? The person who wins the order at any price to make themselves look good but then leaves it up to someone else to try and retrieve the situation and maintain profitability.

How to Avoid Discounts

The best way is to

Just Say No!

Maybe not as bluntly as that but if you get asked for a discount, push back.

  • Why do you believe what we are offering isn’t worth what we want to charge? (You’ll generally get a ‘comparison’ response here. You’ve already done a great job differentiating your product or service so you’ll have no trouble fending this one off, right?)
  • What did you have in mind, Mr Customer? (And don’t be fobbed off with “Something lower than this”. Ask for specifics and then ask what parts of the offer they are prepared to lose in order to meet the new price.)
  • If I do that for you, Mr Customer, what can you do for me? (If they really insist, ask for something of value to you in return – shorter payment terms, bigger upfront payment, order by a certain date, use your imagination!)

Next time someone asks for a discount, just remember what it could cost you in terms of extra work to make back that lost profit and just find a way to say no!

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