If there’s one piece of advice I’d offer to any entrepreneur starting out, it’s this: Never
discount—no matter how much you may be tempted to— always look instead to add value.
Many seasoned entrepreneurs discount as a way of doing business, without ever really looking at their numbers or the real costs of cutting their prices. They’ll point to “discount” success stories like Wal-Mart or complain that the competitive landscape forces them to cut prices. While Wal-Mart, one of the great retail success stories of all time, has built its brand on low prices, most business owners don’t see the very real distinction between “low price” and “discount.”
Related: Death by Coupon
First off, a company like Wal-Mart knows every margin to the “nth” degree and can deliver low prices because it has created scalability based on the huge volume of products it sells. But very few companies have such pricing power. Unless you do, there are better ways to play the retail game than looking to compete against Wal-Mart.
If you don’t really know your margins or have any scalability on the cost side, straight discounts are a ticket to disaster, not only in terms of finances but also in people costs. In a discount environment, you are essentially setting your team up to work more for less money.
Here’s how …
Let’s say you’re selling a widget for $10 a unit, and your net cost is $7. Your net profit on each widget sold would be $3. If you sold 10 widgets at full price, your net profit would be $30.
Now let’s say you decide to have a sale with a 10% discount offer. After selling 10 widgets at $9, you have revenue of $90. The net cost for widgets remains constant at $70, but your net profit has decreased to $20.
That doesn’t seem too bad. Until we realize we need to sell 50% more widgets just to keep our profit dollars even, at $30.
Take a look: 15 units X $9 = $135
$135 - $105 = $30 profit
The numbers look worse the more we discount. At a 15% discount, we’d have to sell 100% moreunits (a total of 20 widgets) to keep our profits at $30:
Example:
20 units X $8.50 = $170
$170 - $140 = $30 profit
Would you really want to run a company where the pressure is on day-to-day to sell 100% more units just to stay even?
Now you can start to see why failure rates of businesses that continually discount are so high and why the burnout rates of their owners are equally bad.
Playing the discount game means you’re literally going into your company everyday to price yourself right out of business.
Related: Groupon, Other Deal Sites Not a Good Deal for Small Businesses
So what’s the solution?
1. Know your numbers and margins and protect your margins at all “cost.”
This simply means you need to know your cost basis at every level of your company andlook to lower it where you can. Then, at least, if you decide to offer a price incentive, you’re not cutting your own throat to do it.
2. Add to your value proposition at every opportunity.
While you shouldn’t discount, you should always look to add value, both real and perceived. That could mean bundling options or packages, or it could mean a better customer service experience. People are more willing to pay for good service these days than ever before.
3. Develop a growth rather than discount mindset.
The reality for any business is that you won’t ever be able to cut your way to success. You can cut costs only so far before some aspect of the business suffers. Growth is really your only option. So start to think of ways you can leverage your current resources in new or innovative ways. Reposition products or services, for example, with a private label at a higher price point.
Whatever you do, think twice about the ramifications of running a 10% off sale, unless you got a really great deal on your inventory. Just remember that “small” 10% discount means someone in your organization has to work 50% harder to earn the company the same dollars. At least in the beginning, that person will most likely be you.
Don’t fall into the trap of thinking if you don’t give discounts, you’ll lose sales. Look to add value and deliver an incredible experience for your customers. You’ll discover new ways to increase profits, while others find themselves caught in the discount trap -- and soon out of business.
Related: How to Take Your Business to the Next Level
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Comments:
I totally agree with this article. If we all got away from running crippling discounts and sold based on value and a fair price, we would be in a much better place. Not just from a business standpoint but imagine the peace of mind you get from not having to shop for bargains on everything. You just know you got the best value at the best price.
It is an interesting post. The way that you have explained about how to compete and win when rivals cut prices is very interesting to read. It gives good idea to me. Nice post.
I really believe that this is all circumstantial. Its hard to just put a blanket concept over every type of business or market and expect it to be correct. For instance, we offer a military and student discount for most of our services. This discount is basically a courtesy as well as a show of respect to the military and an understanding for those struggling financially through school. With that being said, a great majority of our customers fit into either one of these categories and just about every business around here offers similar discounts. We counter this by raising our prices. Now before you start thinking how shady car salesmen like this is, consider our argument. When it comes to services and products, your prices will greatly affect and reflect the type of market you cater too. The lower your prices, the more likely you are to get clients who do not understand quality and who want the whole world for nothing. However, if you raise your prices to reflect the high quality of your service and products, then you will literally cut off the lower end of your market and cater to more clients who do respect quality and understand that you get what you pay for. Now with that being said, if you choose to offer a blanket discount, you have to raise your prices in order to stay within the same market. Not only will this allow you to stay within the same market, but this allows you to gain more customers within that market who greatly appreciate the discounts you do offer. There is a balance. I do not believe you should offer random discounts or lower your prices in order to beat your competition. You will only find your self beating your head against the wall. However, if a discount trend such as military discounts has already been established within your market, you should consider following that trend, so long as you consider raising your prices as well.
Great article, Howsoever we are in a service business and and often times customers want to feel as though they are getting a deal after the service is done. we can cut $20.00 off the invoice if they pay cash.
If you have to exlain you have already lost
Yes this is the best thing. As before sometime grant cardone has shared some tips of increasing the sell. In that he have discuss one point and the point is instead of reducing the price of the product for more selling , try to explain the people why you have the high price for your product than other and what are the qualities they may like. So this strategy will drive more profit and with that more attention of the people.
This article and the author make the fundamental mistake many do regarding discounting, value, and market acceptance. All the monetary examples while interesting are based on the ability to sell a product or service at a specific price. In the real world the marketplace will determine what will ultimately be paid. If you are unable to profitable sell at that price, you do not have a viable product or service. Also, conversations about “margin” and not discounting are truly just academic babble! No bank has ever allowed you to deposit margin – only profit! A sale at lower margin is better than no sale at all. The two best ways to lower your selling price and be competitive while still maintaining viable margin are efficiency of operation and volume of sales. Competition by its nature is designed to bring prices down, quality up and increase sales volume. The dream world this article exists in ignores market dynamics that always (that is always) will seek out the best value. In the real world today best value is almost exclusively tied to price. Even the luxury brands are responding to this market pressure. Just check out the outlet malls all over the nation! If you sell commodities, things that are the same or very similar to all others (rock salt, light bulbs, clothing), your price is the only thing that will truly matter to your customer. If you sell things or especially services then selling your successful track record with other clients will allow you a little leverage in pricing. If you have more business than you are able to handle, expand your business in exactly the same line or raise your prices to drive off the lowest value business. I base these comments on 37 years of successful business consulting and as a business owner and senior management in business that I did not own. But I could be wrong!
I have to compete with someone who markets an inferior service at a much lower price, in an industry where the clients don't know how to compare what we do, until they're often disappointed by the 'competitor.' When they ask why I can't put together a show for $500 like the other guy, I simply say "You can get a car for $500, too... and if it's your first car you may be happy with it. Until it breaks, then you'll wish you were back on the bus with the $500 back in your pocket." Shaun Eli Ivy Stand-up Comedy
We are facing this right now. We have seen a steady decline for the last 5 years in our enrollment for face-to-face software training classes at our university. We had a 40% off sale for a limited time. Enrollments went up 32% and revenue even went up by 9% compared to the same period the previous year. We installed a loyalty program (buy 3 classes, get one free) to maintain this momentum. But, now that the sale is over, we are seeing the same decline in enrollments. But, there is definitely a price-sensitivity issue. I think our enrollments are down, because of less expensive online software training (ie: lynda.com). Our classes are differentiated by being face-to-face, but at $189 for a 6 hour class, students look past the value of personal instruction when they compare it to the $25 per month (unlimited classes) cost of lynda.com. If we reduced our price to $125 per 6 hour class, we may get more business. But, like you said, we'd have to double our enrollments to maintain the same margins. But, we may have no choice.