To discount or not to discount? Now that's a question that has troubled many companies over the years. Discounting might at first seem like a jolly good idea to draw in customers who will buy in larger quantities and increase your profits but it cannot ever be seen as a viable long-term strategy and should only really be considered as a short-term "fix".
Why? It's because buying something cheap causes customers to devalue or view their purchase as having little or no value. What happens is something called Value Attribution, which simply means the inclination to buy imbues a thing with certain qualities or characteristics based on an initial perception. Will they return and be loyal customers – unlikely. The last thing you want is a buyer to associate you (or your company) with selling cheap products or services.
Generally speaking, most business owners hate discounting. Why would you want to discount if that means slashing your margins? Nevertheless, this is still one of the most common tactics to drive sales, and it is therefore critical that it is managed in the right way.
So, not all discounts are bad. There are some situations when discounting can benefit your company:
Discounting to get rid of unsold goods
If you have products that would perish or become obsolete in the very near future, and if the demand is not high enough, you probably don't want to hold onto them. In this situation discounting is preferable to selling nothing.
Discounting to reward loyal customers
If you have customers that have done good business with you for a long time, you might consider giving them some special treatment just to show gratitude and maintain healthy relationships. Discounting acts as a reward and you will build some great partnerships, leading to increased future orders.
Discounting thanks to economies of scale
If you have a large order that allows you to achieve economies of scale or receive a discount from your suppliers, you may consider passing part of this gain onto your customer in the form of discounting. If discounting can be linked to greater volume sales and lower unit costs for your business, giving a discount does not necessarily mean hurting your margin. This is a common practice in B2B sales.
Here are some ways to use discounts:
- Seasonal sales - a discount on seasonable products can substantially increase sales when the selling season for those products is just starting or almost over.
- New products - introductory lower prices will start word-of-mouth advertising in motion to spread the new idea to other customers quickly.
- Senior citizens and students - special interest groups can build more volume. Discounts will encourage them to refer their friends
- Break into a new market - when you discover a new target market for your products or services, lower prices can help you acquire new customers quickly.
However, even when you know what type of discount to use it might not always work out as well as you expected. In many cases you will still run into pricing leakage and money-left-on-the-table problems.
Here are eight reasons why you should resist discounting your products/services.
1) It shows a lack of confidence
When you’re offering a discount on your product, what is that saying to your prospect? It’s saying that you don’t believe enough in what you’re selling to be able to sell it for the standard price. As soon as you offer a discount, your prospect immediately loses confidence in you and sees that you don’t stand behind what you’re trying to sell to them. When you've lost your confidence, you've most likely lost the sale.
2) It sets a bad precedent
As soon as you lower your price, your customer will expect the same thing next time. Or, they’ll hold out until you offer another “special” offer. It's likely they won’t purchase without a discount. Discounting is not your only option. You don’t want to set the precedent that every time your customer buys from you, it’s at a discounted price. That’s just bad business.
3) It projects lower value
Most people value something based on its price. However, it is your job to sell the value of the product without having to resort to discounting, i.e. demonstrate to prospects that what you're selling can truly add value to their life or business. Don't play the discount card straight away, thereby trashing the value in the eyes of prospects.
4) It demonstrates untrustworthiness
At the beginning of the sales conversation you spelt out your standard pricing package – and the very best you can do for your prospect, then, at the first sign of a sticky wicket you offer a discount, what does this demonstrate? Well, it shows that you haven't been entirely honest and even if this particular deal goes through, you’ve set the stage for questions and mistrust in future engagements.
5) It focuses on price
Well, that's what happens when you leap in and offer a discount! When the conversation is focused purely on price, it doesn’t give you room to talk about the other important things, like your prospects’ needs or business challenges and how your company is offering the ideal solution that will make their lives easier. In the long run, it’s hard to sell something based entirely on its price rather than value.
6) It depletes your profits
With ever-increasing competition, it’s even more important that you hold onto as much profit as you can. If you discount by 50% it means to hit your same revenue goal, you’re going to have to sell twice as much. Do you have the time or the workforce to do that?
7) It creates undue stress
If your salespeople offer regular discounts they are going to have to sell a lot more in order to meet their quotas, which in turn affects their ability to sell effectively. They are going to be stressed, rushed, and very driven to move onto the next sale, always playing catch up. Prospects can sense their discomfort – and will use this to their advantage.
8) You lack an effective system to manage discount rules
Imagine you have an exhaustive price list with large numbers of products and customers. If you want to set different discount rates for different products, different customers, different levels of inventories, etc., you might find it challenging to manually go through each item. As a result, usually only products that bring the highest profit and large accounts are taken care of, while the rest may not receive much attention.
What To Do Instead
1) Focus on value
A number one priority, you need to focus on how your product or service can add value to your prospect’s business. Maybe it’s the fact that you’re helping to free up more time for them to focus on other parts of their job. Maybe you’re making their payroll process more efficient and cost-effective. Whatever it is that you do, focus on how working with your organization will make their life better in some way.
2) Get to know your target audience
Find out what are their goals, what do they struggle with, what does their day-to-day look like? It will help you position yourself in a way that makes what you’re selling a win-win. Price isn’t even an issue because you’ve successfully shown that you've understood their challenges and can successfully solve their problems.
3) Demonstrate confidence
We're not talking arrogance here but if you don't fully stand behind your product then why should your prospect? It’s essential that you exude confidence when you’re in a sales meeting, in yourself, your business and your product/service. You're looking to excite your prospect with your enthusiasm.
4) Prove that what you’re selling works
You want to be able to demonstrate that what you’re selling will make a positive impact on their business. This can come in the form of testimonials or case studies of your current customers sharing how great your product/service is. Whenever possible, make sure that these forms of proof include data points and prove you deliver measurable results – simple, it's the power of numbers!
5) Employ a specialised Configure Price Quote (CPQ) System
With such a system, you can make sure that your discounting guidelines are communicated effectively to sales staff, and that there are no more lengthy back-and-forth emails to give out quote approvals. A system like this can also allow you to set complicated discounting rules based on various factors so that each discount is optimised to work in your best interest.
Discounting is not all bad news
In the right place at the right time it can be a useful tool to use. According to research conducted by PrivalEdge, companies that exercise good discount rules can see a 5% increase in volumes and 60% increase in profit. The emphasis here is that they must be managed, strategic discounts.
However, the unintended consequence of heavily discounting a product at the wrong time and in the wrong circumstances may be that the buyer, sensing little value, chooses not to buy any other products in the future. You have been warned!
The Discount Deception - Why Dropping Your Price Hurts You! by Victor Antonio, 2014
The Strategy and Tactics of Pricing, Tom Nagle and John Hogan 2016
Marketing:concepts and strategies, Lyndon Simkin and Sally Dibb 2016
Pricing with Confidence:10 ways to stop leaving money on the table, Reed K. Holden and Mark Burton 2014
Brilliant Selling:what the best salespeople know, do and say, Tom Bird and Jeremy Cassell 2012