The Dangers of Discounting in a Downturn

  • Posted by Judy Reynolds 26 May
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The Dangers of Discounting in a Downturn

This is the second part in a series of blogs on Doing Business in a Downturn.  If you missed the first one you can find it here.

 

Discounting can eat directly into your profits.

 

Too often the first strategy to maintain market share or to generate sales is to discount pricing – particularly in a downturn.  This is a strategy that must be strategic, intentional and the numbers must stack up.

 

Giving a 20% discount is like working on Friday’s for free!

 

Consider this…  A retailer who has a gross profit margin of 35% must increase sales by 40% if they discount prices by 10%.

This is massive.  If sales do not increase by 40% or more the business will suffer reduced profits.  From the point of view of the customer a 10% price discount may not be a serious incentive to buy, yet the effect on the retailer’s profitability can be significant.

This, as a strategy is often very much about working harder not smarter… you may generate some cash in the short term, be run off your feet serving more customers, BUT feel the pinch of reduced profit in the longer term.

Most businesses discount because they think that price is the deciding factor in the buying decision.  They hope that a discount will incentivise a customer to buy.

In fact research indicates that when asked the question…  “Why do you choose not to deal with a business or to leave a business and go to a competitor?” price did not rate highly –

  • 3% > more convenient to purchase elsewhere;
  • 9% > relationship with a person at a competing business;
  • 15% > couldn’t get the product they wanted at the price they wanted at the time they wanted it;
  • 68% > perceived indifference – the care factor was low; and
  • 5% > other reasons.*

 

Here are 6 Insights to help you negotiate the pricing story

  1. Potential customers come to your business because they have shown an interest in your product or service specifically.   Be able to clearly articulate your value proposition and ask for the sale.
  2. The reason why people ask the “how much” question may not always be because they are shopping around on price.  It may be that they see this enquiry as an icebreaker, a place to start the conversation… not to start and finish it.
  3. By answering their question and giving them the price (and only the price), you are actually showing that you are indifferent to them… indifferent to whether they buy from you.  Remember – 68% of people leave not because of price but because of perceived indifference.
  4. Indifference turns up in many forms – like not asking your customers what their needs are, what features are important to them or what they have experienced in the past.  It shows a lack of interest.  As does not actually asking for the order or the sale.
  5. If the salesperson gives the customer the price, and then neglects to ask for their details so that they can follow up or assist further, this is also an example of disinterest in whether the customer buys or not.    When you consider that 8 in 10 people purchase after the 5th contact with a company, it is easy to see why follow up is so important.**
  6. If you are continually running discount promotions, you are effectively training your customers to wait until you have your next discount promotion.

 

3 ways to avoid discounting and NOT compete on price

  1. Improve your customer service – be innovative and create a WOW factor – ramp up the customers’ shopping experience – their experience is intangible yet valued.
  2. Add value – instead of discounting add a bonus product or service – something of low hard cost and high perceived value
  3. Educate customers about the value of your product – focus on the benefits – the what’s in it for me (WIIFM) from the customers perspective.  Bring something to the table that they don’t know.

The warning… ongoing discounting as a strategy for increasing sales will not guarantee increased profitability.  Work through the numbers.  Know exactly how much your sales need to increase to maintain profitability.

 

Download your FREE Discounted Pricing Matrix

*Source:  From U.S. government study “Why Customers Stop Buying.” Comments by Warren Greshes and Bob Mellon

** Source: National Sales Executive Association study

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