Discounting’s Surprising Effect on Profitability

February 20, 2015 | Roger and Susie Engelau

DISCOUNTS background is made up of multi-colored cut out figuresImproving Profitability —  1 Easy Way to Do It Quickly

Afraid you’ll lose sales if you don’t discount? Is your top salesperson discounting too much?

Discounting prices is a surprisingly common practice among our business coaching clients. Also surprising is the negative effect it has on overall profitability.

You’d think that offering a discounted price would increase overall profitability but when you analyze bottom line results, you don’t attract more sales or keep more customers.  It’s true that sometimes discounting can keep a valued client but only so long as the customer is truly a high-dollar customer who’s truly  going to add value to bottom line profitability by staying around in the long run.

Don’t Discount as a General Practice

Here’s why it’s bad for your profitability. If you constantly discount, why have a regular retail price?  With a 20% discount at a 30% gross margin, you’d have to sell 200% more than normal to maintain the cash generated from your sales!  

For more numeric equations that prove how discounting causes overall decrease in profitability, check out ActionCoach blogger Terry Lussier’s, short article titled “Discounts vs. Profits.”  If you’re still not convinced that discounting prices results in decreased profitability, Lussier’s article tells an interesting story from a customer’s perspective. Essentially this customer routinely uses the phrase, “I’d like to buy but the price is too high,” then sits back while the salesperson unravels and  fidgets his or her way to a lower price.

Negative Psychological Impact on Profitablity

Discounting not only costs you money, it gives the impression that your normal prices are a rip-off or, worst of all, that your products and services aren’t all that valuable.

In Psych101 we studied the research that proves that the more we pay for something, the higher we value it.  Customers may also hold off buying, thinking an item that’s $100 today may only be $80 tomorrow.  Instead of discounting, offer more value-added.  Don’t set a precedent by discounting—if you do it for one person, others start expecting it.

Protecting Your Profitability

Keep your eye on profitability. In any decision ask yourself, “How will this drive profitability?”

Train yourself and your sales staff how to react to the price objection. When the customer drops the “price objection bomb,” the first reaction can be a split-second of panic, “Oh no, what do I say?!” Get training on and practice these top price-objection handling strategies:

    1. Don’t hesitate
    2. Restate the objection
    3. Rephrase the value of the product or service

Check out this article “Crush Price Objectives,” from Tom Reilly which gives a quick review of strategies that work and quotes a confidence-boosting study claiming that half of all price objections are phony.

Try asking yourself this question 3 times/day – How will this drive Profitability?