Why Discounting Is Killing Your Business

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WHY DISCOUNTING I S K I L L I N G YO U R BUSINESS

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Don’t wage a price war: why discounting is killing your business

W H Y M A N U FA C T U R E R S A N D DISTRIBUTORS DISCOUNT

Discounting as a pricing tactic is as old as the sales profession itself. Your ever-demanding customers are after a good deal and your salespeople are gagging for a quick win. Offering specially-reduced prices can be powerful, there’s no denying it. We’ve all seen the hordes of people racing to supermarkets on Black Friday, elbows firmly engaged and ready to holler at any unsuspecting fellow shopper that might dare to reach for the same toaster as them. In reality though, discounting is killing your business, with every cent you knock off your list price for a what will be a very short-lived spike in sales. The wholesale distribution industry is one rife with competition, competition that will likely have the same product or one very similar to yours on offer. In such a bustling market, your customers are all powerful and they can chip away at your bottom line with very little effort, playing you against your competition in a never-ending price war. So it’s not surprising that many wholesale distributors think the way to see light at the end of the tunnel is to cut prices to get a deal over the line.

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Don’t wage a price war: why discounting is killing your business

Who dictates your pricing?

Who should dictate your pricing?

Your boss? Your sales director? Your finance team? More

Theory suggests that your marketing team should control

often than not, senior management will dictate pricing and

and dictate the pricing of your products. Let’s go back to

simply force this onto your sales team and subsequently

your high school Business class. Remember the 4Ps that

your buyers. However, without any understanding of the

your teacher probably prattled on about for at least a

pricing strategy you should be adopting, setting a price can

couple of lessons? These 4Ps of the marketing mix are what

end up being nothing more than a shot in the dark for most

the crayon-wielding, creative ninjas live by: product, place,

departments of your business.

promotion and PRICE.

Your sales director will likely look to set the price as high as

Your marketing team will always have an ear to the ground.

possible to generate the most revenue, the same goes for

They know your customers inside out, your market like the

your boss and your finance team.

back of their hand and competitors like their closest friends.

A price too low and you’ll be throwing money away; Too high

A bit of market research here, some sneaky competitor

and you’ll see a dip in sales volume. It’s a tricky game to get

analysis there – your marketing team really are in the best

right and should involve a team that know what constitutes

position to dictate your pricing.

an acceptable price for your customers. This doesn’t mean that your management team or finance gurus should be left out altogether, but marketing should

Things to establish before setting a price:

1 2

What value will your product or service bring the buyer?

Are your customers price sensitive?

3

What are you doing differently to your

4

Is your customer willing to pay $XYZ for

5

How much margin do you need to make

competition?

your product?

have the overarching ability to dictate the price of your product or service depending upon seasons, trends or competitor activity.

selling your product worthwhile?

When coupled with a smart value positioning and some really intriguing promotion, price can end up being one factor of many, rather than THE deciding factor for your customers when they’re in the market for your products.

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WHY IS DISCOUNTING K I L L I N G YO U R BUSINESS?


Don’t wage a price war: why discounting is killing your business

Discounting, no matter how marginal can, and will, kill your

Discount to the detriment of long term profits

Customers will bide their time for lower prices

business. A bold statement, we know. We’re all material

While great for short term sales spikes, discounting

If you’ve discounted before, chances are you’ll

people. We like stuff. And we like to get said stuff at the best

will ultimately hit your long-term profits hard.

consider doing it again for that elusive spike in

possible value. But good value doesn’t always mean the

In discounting, you’re not fostering a long-term

your sales volume. Your customers are savvy

lowest cost.

relationship with your customers – you’re having a

beings and will wait patiently for you to discount

fling with a ‘deal shopper’ who won’t ever call you

again. Think of Black Friday, people bide their

But when your customer utters the words “how much is it?”,

back. Plus why should the fly by customer pay less

time knowing that a discount is coming soon. Your

your answer as a product salesperson can (sadly) dictate

than an existing customer who gives you repeat

sales will tail off in periods when you’re not offering

the future of your deal. When followed swiftly by a sharp

business on a regular basis?

discounts and only spike when you cut your prices.

salespeople will “see what they can do” and usually offer

You’re commoditizing your business

Do you want to be a discount brand?

some form of discount package, shaving dollars off your

In the wholesale distribution industry, intense

Lowering your prices essentially makes you one.

margins.

competition

But

Discounting heavily can damage your brand and

undercutting competitors won’t do you any good.

sully everything you stand for as a company.

Low value products can in turn lead to a low value

Most people value things based on price and

company with customers fixated on price with low

knockdown prices can give your customers the

expectations and little to no engagement with

idea that you’re becoming a discount brand.

your brand. You’d never refer to your products as

If that’s not what you’re aiming to do, will your

mere ‘commodities’ so don’t start commoditizing

customers be willing to step up and pay full price

your business with discounts.

when you’re not discounting?

Raises uncomfortable questions

More discount = less profit

Say you cut prices by 20%. The question on your

Imagine your profit margin is 30%. If you’re offering

customers’ lips won’t be “Where do I sign?”, instead

a 20% discount, your profit margin then becomes

it’ll be “What was your mark-up beforehand?!”

10%. As the cost of raw materials continues to rise,

It’s not a question any wholesale distributor ever

along with sharp increases in labor costs, can you

wants to be faced with, is it? If you’ve got the ability

really afford to cut your prices? In short, you’ll have

to slash prices at a moment’s notice, customers

to increase how much you sell to maintain the

can become wary about how much profit you

same level of revenue. Meaning more production

were making before, making you unstrustworthy.

costs, more time and a lot more effort.

intake of breath and “what can you do on the price?” many

It’s killing your business. Here’s why.

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comes

with

the

territory.

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Don’t wage a price war: why discounting is killing your business

H O W T O AV O I D T H E P I T FA L L S O F DISCOUNTING

Sometimes it can seem like there’s no alternative but to

you can rejig your positioning and offer a product

offer a discount to secure a sale. With the threat of your

they can’t live without.

competition ready to lure away your customers as soon as you deny their request for a discount, how can businesses

Make your product a ‘must have’. Make it easy

today really say no?

for your customer to get pepped up and excited about your offering. They’ll be so swept away in the

Competing effectively means doing more than just offering

excitement that the price will be an afterthought.

a cheaper deal. Have competitive prices by all means, but there are things you can be doing to avoid the pitfalls of

Add value

discounting and make a difference with your customers.

This ties in nicely with the previous point. As a wholesale distribution salesperson, you need to

Increase your product range

understand exactly where your company’s offering

A wide product range can encourage your

fits in with their day-to-day lives. How will it change

customers to spend more of their money with

their lives? Will it save them time? Money? Effort?

you. If you’re selling, for example, nuts and bolts to your customers, broadening your product range

Knowing precisely what your product can bring to

to include washers, screws and tools can incite

the table will make those hellish price negotiations

your customers to spend more money with you. A

a thing of the past. Remember that a lower price

wider product range makes it easy for them to get

doesn’t always mean better value, in fact a higher

everything they need from you.

price is often attributed to superior quality.

Think of the likes of Walmart and other traditional

Let your customers do the talking

grocery stores. They no longer sell just groceries;

Your existing customers are your biggest weapon

you can pick up pens, clothes, TVs and even

when closing a sale. Already advocates of your

garden furniture at most superstores today.

brand, sharing case studies, testimonials, videos and references from people already using your

Sharpen up your positioning

product or service can be a game-changer when

Make sure you fully understand your buyers. What

you’re selling. Hearing how good your offering is

are their challenges? What makes them tick?

from other users is incredibly powerful.

What are their goals? Armed with this knowledge, www.sales-i.com

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EXAMPLE OF DISCOUNTING GONE WRONG


Don’t wage a price war: why discounting is killing your business

Franchisees of the fast-food giant McDonald’s claim that they are being forced to offer too many discounts. Getting customers through the door and making profitable sales are two very different things. As private investors in McDonald’s

271

Restaurants taken part in the discounting scheme.

0.2%

Growth slowed by 0.2% in the third quarter.

0.8%

They expect a 0.8% decline in sales in the fourth quarter.

$15

Labor costs on average $15 per hour meaning discounting can be difficult.

franchises, these individuals are reporting huge losses compared with the same quarter of last year simply by reducing their prices. While this doesn’t directly impact customers, it’s clear to see how discounting can negatively affect a company’s bottom line. If companies the size of McDonald’s feel the pain of discounting, what’s to say your wholesale distribution company won’t feel the same?

MCDONALD’S

Instead of discounting, look to McDonalds’ famous up-sell: “Would you like fries with that?” This simple question must have made the company billions over the years; is there a similar question you could be asking?

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EXAMPLES OF B R A N D S T H AT DON’T DISCOUNT


Don’t wage a price war: why discounting is killing your business

Apple

Louis Vuitton

Tesla

Technology giant Apple has never offered a discount. Yet

Luxury fashion brand, Louis Vuitton will never offer a

Business magnate, founder of Tesla, Space X, SolarCity

come iPhone 8 release day, you can guarantee people

discount. Having faced near bankruptcy in the early 1970s

and Paypal and all round nice guy, Elon Musk is one of the

around the world will be camping overnight to be first in

due to private franchisees marking up prices on their luxury

greatest and most humble businessmen of our generation.

line to buy one at list price (or even more on eBay when

handbags and luggage and pocketing the difference. After

Musk recently penned a lengthy email to his Tesla team

stock is low). Apple products have become a cult item that

a swift management shakeup, Louis Vuitton became a

about the very reasons why they never offer a discount on

customers are willing to pay for. From the experience in

vertically integrated company that today owns their entire

their cars. It’s worth the read. We promise.

store to aftercare and support, Apple doesn’t offer discounts

supply chain from factories to shop floors in department

to its customers because they just don’t need to.

stores. Customers can’t purchase Louis Vuitton products

“The acid test is that if you can’t explain to a customer who

anywhere but official outlets or authorized concessions –

paid full price why another customer didn’t without being

making it impossible to discount.

embarrassed, then it is not right.”

think that people will do that if the product is great and if it’s

“Controlling the channel meant you controlled the price.

- ELON MUSK, FOUNDER OF TESLA (...AND OTHERS)

messaged appropriately.”

Without a middleman, margins are higher, offering a

“It’s up to us to convince people to maybe spend a little more for a materially better experience of product. And we

plumper profit cushion during downturns. This practice also - TIM COOK, CEO OF APPLE

confers exclusivity, since you can buy a given product only from an authorized dealer where price is fixed.”

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- HENRY RECAMIER, 1977 OWNER OF LOUIS VUITTON

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Don’t wage a price war: why discounting is killing your business

STATISTICS 67%

Offering discounts means poor loyalty and loyal customers spend 67% more than new ones with repeat purchases . Source: www.inc.com

40%

Promotions often have little impact on buyers – 40% would have bought an item anyway, promotion or no promotion. Source: www.inspectorinsight.com

1%

A 1% pricing discount results in a decrease of 8% in operating profits for the average company.

8%

If volumes remained stable, a price rise of 1% would an 8% increase in operating profits.

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Source: McKinsey & Company

Source: McKinsey & Company

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Don’t wage a price war: why discounting is killing your business

How discounting eats into profits A pricing strategy is something that’s often decided without much thought within many businesses. It’s not an easy task to get right, but business owners often fail to anticipate how quickly profit margins can disappear when they give away a harmless concession here and there such as 10% off their usual list price. For a business with a 20% gross margin, a 10% discount gives away 50% of their profits as raw materials and operational

Costs

Costs

80%

80%

costs remain the same. Is a 10% discount going to increase sales by 50%? Probably not.

Discount

10%

Profit

10%

Profit

80%

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Don’t wage a price war: why discounting is killing your business

TO SUMMARIZE

In short, discounting is bad. Adding value is good. Knowing your customers inside out is key to providing an experience that will keep your customers coming back for more and negating the need to cut your prices just to get that elusive “yes”. Be more proactive in your sales approach and pre-empt your customer’s next purchasing move. Using sales technology can help you to be more proactive you’ll be able to avoid those awkward discount conversations altogether. This kind of software can help you to get ahead of your competition before they even have a chance to undercut you and start a price war. What’s more if you’re being more proactive towards your customers, they’ll trust you more and in turn become more loyal. If this is the case, even a low price won’t be effective in securing their business. Some of the most successful companies in history have never once offered a discount and they’ve stayed true to their morals. A quality product that will help improve or better any aspect of your buyers’ lives shouldn’t need to be discounted.

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Don’t wage a price war: why discounting is killing your business

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