Short answer: No! And here’s why.
Many businesses are tempted to offer discounts believing they will drive profitable growth and secure new customers. But this practice presents many potential landmines, namely, once you discount customers will continue to ask for discounts every time. Undercutting the value of your product or service is dangerous because it can decrease your profitability.
Salespeople are inclined to offer discounts believing it’s the easiest path to a sale, freeing them up to move on to the next sale while making nearly the same amount in commission. They may also see offering a discount as less confrontational – they don’t have to defend the price of a product or service.
Many business owners condone discounting because they believe it’s either the cost of doing business or a relatively harmless approach to “closing” a prospective customer. At the end of the day, adjusting pricing just to close a sale demeans the true value of that product or service – and, it costs much more than you think.
Here are two examples of a new sale – one based on a discount and one based on a normal pricing structure.
Here is the business model:
Gross Profit 40
Commission (5) 5% commission
S, G & A (25)
Net Income 10
And now, here it is with a 10% discount:
Revenue 90 10% discount
Gross Profit 30
Commission (4) 5% commission
S, G & A (25)
Net Income 1
This example demonstrates how your salesperson just gave away your entire profit margin on the sale. Your net income was reduced by 90% while the salesperson’s commission was only reduced by 20%. The reduction in commission now motivates your salesperson to move on to the next sale and repeat the process all over again. This approach to selling will only serve to put you out of business!
Any successful business requires solid profit margins. This allows you to invest in profitable growth, address unexpected customer or project issues, pay employees fairly, and manage your business through uncertain economic cycles.
We counsel our clients to refrain from discounting to keep them out of trouble and maintain their growth trajectory. Watch our instructional video on “To Discount or Not?” Watch Video>
TGG can help set up a sales plan that rewards those that sell at higher prices.
Protect your company from discounters. Let’s guide your success . . . together! Contact us today for a free assessment.