The Dangers of Discounting

  • Posted by Judy Reynolds 24 Jun
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The Dangers of Discounting

Discounting eats directly into your profits.

Consider this… A retailer who has a gross profit margin of 30% must increase sales by 50% if they discount prices by 10%.

This is massive.  If sales do not increase by 50% or more the business will suffer reduced profits.  From the point of view of the customer a 10% price discount may not be significant, yet the effect on the retailer’s profitability is huge.

This is working harder not smarter… you may generate some cash, however, this is a short-term gain strategy resulting in longer term pain.

Most businesses discount because they think that price is the most important factor in the purchasing decision.  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 convenience 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 5 Price Related mistakes that businesses commonly make and how to avoid them…

1. Potential customers come to your business because they have shown an interest in your product or service specifically.  Don’t invite them to shop around with your competitors.  Be able to clearly articulate your value proposition and ask for the sale.

2. The reason why people ask the “how much” question isn’t because they are shopping around on price.  It is because they see this 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 purchase from you.  And remember – 68% of people leave not because of price but because of perceived indifference.

4. And this is because… the salesperson didn’t ask them what their needs were, what features were important to them or what they had seen in the past.  Nor did they actually ask for the order.

5. And to make matters worse, after giving the customer the price, the salesperson does not ask for their details so that they can follow up.  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.

If you are continually running discount promotions, you are training your customers to wait until you have your next discount promotion.

 

4 ways to avoid discounting and NOT compete on price

1. Improve your customer service – be innovative and create a WOW factor

2. Add value – instead of discounting add a bonus product or service

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.

4. Risk-Reversal measures – consider a money back guarantee that guarantees the customer a certain result.

 

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 Break-Even Analysis Worksheet

DOWNLOAD HERE

 

 

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