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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