The discount debate

By: Amit Vyas and Mark Williams

COVID-19 has affected businesses the world over and while there is no way to know exactly what the economic damage from the global pandemic will be, there is widespread understanding and agreement among economists that it will have a significantly negative impact on the global economy.

According to Statista, leading economics have reduced their 2020 forecasts of global economic growth down from 3.0 percent to 2.4 percent. To give some perspective on this number, the global GDP was estimated at around 86.6 trillion US dollars in 2019, and this means that just a slight drop of 0.4 percent amounts to almost 3.5 trillion US dollars in lost economic output.

However, these predictions were made before the COVID-19 pandemic and before the widespread restrictions on social contact the world over. Since COVID-19, global stock markets have suffered significant falls and the Dow Jones reported the largest ever single day fall on March 16 2020. And with all of the statistics above in mind, it is easy to say that for businesses, it is no longer business as usual.

The pressure to discount

For many businesses, work is slow or at complete standstill, while other businesses have been booming, which brings with it its own set of challenges. As businesses are scrambling to keep from going under, companies are feeling the need to drop their prices, and discount their clients until life returns to normal. The problem is that “normal” is no longer possible - we live in the new normal now.

As it stands, everyone expects a discount due to the unprecedented pandemic, and on the surface, offering clients a discount seems to have its benefits, particularly if you have lost customers and are looking to replace their business as soon as possible. Conversely, your business may be one of the few that is doing well during this time, and you may feel it charitable to agree to offer your clients a discount.

Most businesses are also feeling the pressure to offer discounts because this is what their competitors are doing and they feel that if they don’t keep up with their competitors, they will quickly lose their business.

However, if you do choose to go this route you will inevitably be left with less money in the bank, and your business will be expected to produce the highest quality services or products - at discounted rates.

The issue here is that if your competitors are in a position to hold the line on the lower price, you will experience a permanent reduction in your profits and in the same breath, by providing your clients with discounted rates you are also throwing aside your Unique Selling Position, and this is the essence of what makes your product or service better than your competitors.

To put it as simply as possible, by agreeing to provide discounts and reduced rates, you are opening a proverbial Pandora’s Box of problems that will inevitably put your business at risk.

Many business owners do not have a thorough and in-depth understanding of pricing, and this is not due to incompetence, this is solely based on the fact that business pricing is not something taught in school, and it is also important to note that not all accountants will advise business owners of pricing strategy as extensively as they should.

Too many people do not know or fully understand the impact of discounting, so it is time to rectify this.

The self-sabotaging impact of discounting

It is not uncommon to see new businesses entering competitive marketing offering discounts or coupons, and now, in the age of COVID-19, discounts are becoming more and more prevalent and more and more expected.

Discounts may seem like a logical way to help your business stay afloat during this time, but the truth is that reducing your price can quickly hinder your business growth.

Discounting can affect your business negatively because it:

Lessens the perceived value of your product or service Creates expectation for future discounts Complicates your business dealings and relationships with customers Shows lack of confidence or value in your business offerings Squeezes your profit margins Forces you to cut corners in order to attempt to maintain margins

Let’s work with an example that will explain the self sabotaging impact of discounting for your business further.

In this example, we are selling something for $100. Our total costs are $80 and we are making $20 profit.

Now, if the client asks for a 10% discount it may not seem like an unreasonable request, so, would you give it to them?

Let’s take a look at the impact of this 10% discount on profit:

Your selling price is $100 You are making $20 at full price If you give your customer a 10% discount, what are you making on each item now?

The answer would be that you have halved your profit, right? Well, another way to look at it is that you need to sell twice as much to make the same profit, as if you hadn’t given them a discount.

With the above in mind, the problem with discounting is that any discount you do give is taken straight out of your profit. When you are working and fighting so hard for every single penny of your profit, why would you want to be giving it away with poorly considered discounts?

Now that we understand we have seen the potential impact of discounting on profit, there are 3 key strategies you can use to increase your profits:

1. 2. 3. Cutting costs Selling more products Increasing Prices

So, which of the above options should you choose to boost profits in your business?

The simple answer is: all of them!

The first place to begin with implementing all of the above, is with a price increase, the second is cost reduction, and once you have them all in place, start to focus on growing sales.

Cost cutting is positive for business

Cost cutting can be implemented to enhance profit and productivity, and cost cutting techniques, when implemented correctly, are more or less positive than negative.

Price increase is the best choice for your business

Failure to increase prices when you can, may result in a severe revenue crunch when you need your business to scale.

Right now, we cannot allow our businesses to avoid facing the possibility of price increases. Rather, we need to seek to use price increases strategically to increase our selling potential, and this is why educating ourselves on pricing strategy is vital for business success and growth during these uncertain times.

To find out how to make price increases without losing customers, or to access literally thousands of other strategies to grow your business, contact us today, and we will guide you on the pricing strategy path all businesses deserve.

In conclusion

We can understand how at this time it may seem reasonable for customers to expect or want the best deals possible, however discounting will create a lot of problems for your business. In essence, these problems will impact your profit margin as well as your reputation, and this can quickly threaten the life of your business.

There are better alternative strategies that you can implement to showcase your business’s value, and there is nothing wrong from walking away from a deal that will not be profitable for your business - your business has value, and you need to remember this value at all times.