How is offering the price discount your customer is asking for killing your business? This article is about three important ways the discounts you’re offering are affecting your company!
Your value is not consistent with the price
No way, you say? Yes, it’s true. If your customer is asking you for a price reduction, their perceived value of your product is different than it was before. Even if they aren’t stating this with their words, they are with actions. And people buy with actions, not words.
If you only get one idea from this post, please focus on the above headline.
You will have difficulty making it up on volume to even end up in the same place financially for your business
The chart below shows the volume increase required to produce the same gross profit contribution for price cuts.
The chart above is from Malcolm McDonald’s book and it is his copyright for the book with ISBN 978-0-7494-7821-6.
It’s no shock that the higher margin % you enjoy, the fewer additional units you need to sell for a given price decrease. What’s also obvious is that if you’re in a low margin business and you offer a discount, you better have a way to significantly grow the business. If you don’t, your company is going backward.
I know, don’t start with the “Well, part of something is better than all of nothing.” I will cede that point but only up to a certain point. If your discount causes you to go into a negative contribution scenario, all of the growth you can muster won’t make-up for that. It’s well understood in math that a negative number multiplied by a positive number produces a negative number. Always. Every time. Well, at least with integers.
I’m not preaching. The temptation to give-in to a discount because your competitor is offering something is as threadbare and tempting as the apple was to Eve. Unlike the couple in the Garden, don’t give in.
Study the chart above for a minute and you’ll see that if you work in 25% gross profit business and you agree to a 10% price discount, you need to grow your volume by 67%. Just to stay even. It doesn’t matter who you are or what you’re selling, that’s big growth!
Assuming the Low-Cost Provider Position is a Hollow Victory
The reps I work with hear me say often that no one does anything for free very long or very well. When faced with a customer who is asking for a discount, it’s a sure sign something’s changing. Dig in, ask why, what, who, when and how questions to uncover opportunities to provide value.
If you find out it’s a competitor offering a discount, use my Grandpa Milt the Turkey Farmer’s favorite line: “Well, it’s easy to sell Turkey’s at two for a quarter when you don’t have any.” Remind your customer of the value you bring and help her see how far you’ve come together.
In fact, even better, do this regularly to avoid a competitor framing your value for you. Remember, the best one to sell your value is you!