How to avoid discounting your price and hold your profit margins
Don’t you hate it when you’ve worked so hard to influence a prospect to buy from you and they start putting demands on you to reduce your price.
Any attack on your gross margin to reduce your price is an attack on your bottom line. That’s because your overheads don’t change and the cost of acquiring your goods and services don’t change.
Anyone can sell their products or services cheaply enough, it doesn’t take a lot of skill. It takes a real professional to hold your margins in the face of pressure to discount your prices.
Let’s look at the impact of discounting.
The impact of discounting
The words margin and markup are often used interchangeably. Your markup is the amount or percentage you add to the cost of acquiring your products or services which in turn determines you retail or sale price. For example:
If you acquire a product for $100 and you add 100% markup of a $100 your selling price would be $200. This would represent a 50% margin.
Here’s why should avoid discounting your price. It’s an attack on your bottom line and you have to sell more products or services to make up the deficit.
|% of Discount Given|
% Margin (Markup)
What this means is if you work on a 50% margin or 100% markup, and you give a 10% discount, you have to sell an additional 25% of volume at that discounted rate to recover the equivalent of your full gross margin in terms of profit.
$100 @ 50% = $50. $125 @ 40% (50% less 10%) = $50.
Sounds straight forward doesn’t it but what about other hidden costs. Having to sell extra volume can also add additional costs in freight and handling which you may or may not have thought of therefore eating more into your profit margins.
If discounting is an attack on your bottom line, the answer is to learn to either sell better or negotiate better.
Price Cost and Value
The price is the amount the customer pays when they purchase a product or service.
The cost is subjective. There is both a cost to you as a seller and a cost to the buyer. Costs take into account time spent, lost opportunity, risk and ongoing costs after purchase and for the lifetime of the product or service.
Value on the other hand is when the customer considered the price and cost with the benefits they receive from making the purchase. This too is subjective. No one buys on price alone, they buy on value. The only time people buy on price is where they compare the exact same product with the exact same specifications from different vendors.
A compelling value proposition helps you differentiate yourself from your competitors. It might be your product, your service, location, speed to market, accessibility, price or many other factors. The more points of difference you have – the more you can offer a customer something uniquely of value to them.
A value proposition is a clear statement of what tangible results a prospective buyer is likely to gain from using your products or services. It’s the promise of what value a prospect will receive if they buy from you. A value proposition needs to be relevant, unique and offer value.
How to handle price pressure
If you have taken the prospect through the Bi-Sell-Cycle™, uncovered their needs, explored the impact if they don’t buy from you and agreed on their target goals, you have already come to a conditional agreement to move forward. Done well, haggling over the price should be less of an issue. However, there are other reasons buyers may want you to discount your prices.
When it comes time to discuss price, never ever apologize for your price.
1. No tension to buy
If they begin to haggle about the price, you may not have created enough tension for them to buy. Buyers buy for two reasons, to avoid pain or gain pleasure. The greater the pain the more they have to gain from making a buying decision, the more motivated they are to buy. This is no different than handling an objection. If this is the case you need to go back into the first three stages of the Bi-Sell-Cycle™ to uncover their dominant buying motive.
2. Trying it on
Sometimes buyers are just trying it on to see what you will do. Typically, they may say things like…. “I was hoping to get it for around $___” or “Is it possible you can do it for $___.”
If this is the case, ignore it or laugh it off as if they’re not serious. You might say something like… “You wouldn’t want me to go out of business would you?”
Another reason a buyer might want you to discount is that they are afraid of overpaying just as you would be. If they have done their research, they know what you are worth. If they haven’t, you may need to reassure them that your offering is at fair market value and focus on what extra value you have to offer – hence the reason for knowing your points of difference. In this case, quite often they are testing you.
4. They can’t afford you
Another reason a buyer might haggle over the price is that they really can’t afford you. They don’t have the budget and they really want to do business with you. If this is the case perhaps you can scale back your offering to what they can afford you or walk away. They get what they pay for.
Typically buyers in this category might say something like That’s out of our budget we can only afford $___”or “Sorry, I can’t go over $___”
5. They’re trying to save money
This may be another name for being a cheap skate. They want you to lose so they can win. Doesn’t matter what your price is – they just want it cheaper. Consider this, if they do this to you they will never be a long-term customer. They will always shop around for a cheaper price flitting from one vendor to another. What you want are loyal customers who will buy from you time and time again.
6. They don’t see the value
Alternatively, the buyer doesn’t see the value in products or service offering. You must focus on the value or the benefits they will receive by doing business with and make sure you tie this back to their target goal or dominant buying motive.
You might say something like this… “You mentioned Mr Customer you were struggling financially because your prospects were abandoning the cart at the last minute. This is costing you sales. By implementing this solution, you would immediately convert more prospects at the check-out page significantly increasing your conversion rate therefore growing a profitable business.
Focus on what makes you different. Remember price is only part of the cost.
As a last resort
If you must give a discount, ask for something in return. It may be a testimonial or a referral or a future order at full price. You might even ask for extra time or a deadline extension, anything that doesn’t see you out of pocket. You want to aim for a compromise.
Secondly, always invoice at the full rate then clearly show the discounted price with a proviso this is a one-off deal. What this does is set future expectations that any repeat business must be at the full price.
Lastly be prepared to walk away. I know this is hard if you are a new or struggling business. Walking away sends a message to the prospect that you are worth every penny and builds your confidence in your product or service offering. Sometimes, they are just not your customer.
Handling the price objection
Here are some tips to flush out price objections and handle them with ease.
- Apart from price, what else is important to you?
- Apart from price, how do you feel about everything else?
- What is it about the price that concerns you?
- If you need a cheaper price, what would you be prepared to give up?
- I understand that price is an issue and my competitors have a cheaper option. How important is (quality, speed, delivery) important to you?
- What you want to know is, what you get for the extra price if you do business with me? Let me show you… (and talk about price, cost and value).
- At this price, you receive XYZ, compare that to the other price – what you are missing is ABC.
The value triangle differentiates between cost and value and highlights the alternatives.
On a final note
When you hold onto your price without discounting you are far more likely to grow a profitable business.
In a nutshell
- Discounting is an attack on your bottom line
- You need to sell extra to make up for the loss in margin
- There is a difference between price, cost and value
- Always sell on value, the benefits your customers will receive
- Develop a strong value proposition to focus on what differentiates you from your competitors
- Never apologize for your price
Why customers ask for discounts
- There’s no tension to buy
- They’re trying it on
- They’re afraid of overpaying
- They can’t afford you
- They’re trying to save money
- They don’t see the value in your offering