6 Reasons why discounting your price is a bad idea
Anyone can sell cheaper; it doesn’t require a lot of skill. However, if you want your business to be viable, it’s important that you understand the impact of discounting.
When salespeople come up against a price objection, they are always far too quick to discount their prices. Why? Because it’s the easiest thing to do. What’s harder, is to handle the price objection and hold your ground.
Let’s treat discounting for what it really is – an ATTACK on your bottom line!
1. Discounting impacts your bottom line
The figures in the chart below represent the additional percentage of sales volume you need to sell to achieve the same gross profit if you did not provide a discount.
|Discount||Percentage Margin (Mark Up)|
|10 (11.1)||20 (25)||30 (42.9)||40 (66.7)||50 (100)||60 (150)|
For instance, if you work on a 50% margin (100% mark-up) and you offer a 10% discount, you will need to sell an additional 25% at the discounted rate to recover the effect of discounting.
$100 @ 50% = $50 or $125 @40% (50% less 10%) = $50
Apart from the fact that you need to sell more to achieve your gross profit margins, you could also incur other increased costs such as handling and shipping depending on your business.
Yes, you might see a spike in sales but then what? What you are in fact doing is grooming your customers to always expect you to offer a discount in the future. You are also telling the customer that YOU don’t believe in the value of the product or service you are offering.
Unless you have a strategic or tactical reason for discounting, it can also devalue brand equity.
2. Your pricing strategy might be wrong
You might be tempted to discount your prices to match the competition. This can be a big mistake if you base your pricing strategy on what your competitors charge. You might be buying into your competitor’s overhead structure which is not the same as yours. They could be going out of business and looking to recoup their losses or are in desperate need for a positive cash flow hence their pricing strategy.
Your pricing strategy must match your cost of doing business. This comes down to your target market and how you position yourself in the market.
3. Price is not the only consideration
In spite of what many people believe, price is not the number one reason people choose a particular product or service over another. If that was the case, then why do people buy $10,000 watch when you can buy a $100 watch? Why do people go to a restaurant when they can cook at home? Why do people buy expensive clothes when they can buy cheap clothes or go to an op shop?
What is important is to know what your value proposition is and how you set yourself apart from your competitors.
4. Price Cost Value
Differentiate between price, cost and value. Price is what you pay. The cost has far greater implication including opportunity cost.
Let’s say you found a gas station that has the cheapest gas but its 25 miles away, price is what you pay per gallon but cost also includes the extra gas you use to drive so far when you can fill up close to home. Convenience also comes into play as does value. A lower price could mean a higher cost in the long run.
Value will mean something different to different people. It’s your perception of what value is along with what other alternatives are available along with urgency. People will buy on value not just price. That’s why preparing a value proposition for the products and services you offer is so important.
5. Buyers might be trying you out
The number one objections salespeople get is a price objection. Don’t always take it at face value, there might be something else going on. It could be the buyer is not interested because you haven’t built trust and confidence and they don’t like you. People buy from people, not on price.
They might just be shopping around for the best price in which case even if you land them as a customer, they won’t remain loyal to you for they will try it on again in the future.
Watch out for buyers who put pressure on you when it comes to them making a buying decision. When it’s time to close the sale, this is when buyers are most likely to try it on even though they have already made the decision to buy from you.
6. Price objections might be a tactic
Before you talk about price, you need to understand what the buyer’s motives are, what is their WHY. What is their target goal? Bringing up price too early in the sale process means the focus is on price and not the buyers why.
If you do get a price objection in the sales process, drill down into what the buyers reason is for wanting a discount. Focus on selling value and match it to the buyers why.
Slow down the conversation and ask them, “apart from price is there any other reason for you not to buy today?” What this question does is flush out the real reasons for them wanting a discount. It also gives you time to think about how well you handled the sales process and if you found the buyers need or dominant buying motive. If not, you will need to go back to the beginning of the buying and selling process.
Be confident in what you offer, never apologize for your price. Buyers also want to feel confident that you are the right person for them to do business. Confidence is contagious.
Focus on the value you provide not the price and match the value to resolving the buyers need. If your product or services matches their target goal, they will begin to see the value and not the price. Talk in terms of the benefits, what they are really buying what your product or service does for them. People don’t buy insurance; they buy peace of mind. Women don’t buy cosmetics, they want to look and feel good about themselves. How do you put a price on that?
Don’t devalue your product or service too quickly, trade something in return instead. For instance, “I am happy to offer a cheaper price however it will mean not including the delivery.
With a premium product or service, demonstrate the extra value the buyer will get compared with your competition and remember people buy from people regardless of the price.
As you can see, people buy on value and cost not just the price. Learn to sell and negotiate better to protect your bottom line.
Sometimes it’s better to walk away from the sale than lose money.
On a final note
When you hold your price, you are far more likely to remain profitable.
In a Nutshell
- Discounting is an attack on your bottom line.
- You need to sell more to achieve the same gross profit.
- You could incur additional costs such as handling and shipping which eats into your bottom line.
- Price is not the only consideration, people buy on value.
- Differentiate between price, cost and value.
- Sell the benefits instead of dropping your price.
- Buyers might be trying it on when they have already decided to buy.