What if you discovered discounting your prices cost you twice as much?
Here's a simple math question: If your profit margin is 20%, and you give your clients a 10% discount, how much more do you need to sell to make the same amount of profits without discount?
Answer: Twice as much. That means twice the marketing expense (not to mention the effort and time), twice the selling expense, twice the administrative expense, twice the operations expense, and probably a lot more than twice the customer service expense. In fact, by the time you're done, you'd probably have lost out on more time, more money and more resources (including staff time) than if you hadn't discounted in the first place. Now imagine a business that has a 10% profit margin and offers a 20% discount…
So why do so many businesses offer discounts? Some simple reasons are: getting more people to hear about the brand; promotion in the hope that future repeat purchases will cover short-term losses; getting rid of old stock; or simply being unaware of the implications of discounting - they don't know the numbers. There are more reasons, but the last one is lethal.
The potential pitfalls of discounting are two-fold: the short-term is to drain existing resources for marginal gains (if there are any gains after discounting). The second is to risk being viewed as a "discount brand", and damage the reputation of the business. Many clients don't initially realise that - by discounting - they not only take away the profit from their work, but sometimes drive themselves into a loss!
So should businesses never discount? No, they should…if it'll help the business in the short and long term. The risk comes when the costs aren't calculated in their entirety, when profit margins are "vaguely" known, when discounts are given to make a sale and their impact is not known. Sometimes discounts are just plain illogical; I heard of one company that won a much coveted tender by giving their client a 95% discount!
Making sound, numbers-based decisions is crucial in ensuring business success. If you don't know your profit margins, make sure you figure them out quickly. If your team don't know, make sure you educate them. It would be a disaster if a team member offers a discount to make a sale, and hurts the business in the process. Most importantly, if you're in an industry where competition is fierce, make sure you and your team know how to communicate value to the client, so that they are willing to pay a bit more for it.
We'll be looking at margins, breakevens, money mastery and what sets you apart (your niche) in the upcoming workshop on the 13th of March. Places are limited, so I really hope you've already booked your spot. To register now, or to get more info on the event, please visit the link in the "Useful Tools" below.
To your success,
Murtaza