Why Discounts Are a Trick Go ahead, have a sale. Give a discount. Be a sport. But know that you're just playing an age-old game of pricing.
By Gene Marks Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
You know a secret don't you? You know that when customers walk through their favorite department store this holiday season and see signs like "20% Off!" or "Marked Down 40%!" they'll think they're getting a bargain. But you know not to believe it, right? Retailers are misleading their customers. They're not marking down anything. They're marking up prices -- up from the minimum margins they need to make a profit. It's just that we are humans and we are weak. We see "sale" and we actually believe that it's a sale. It's not. Because unless a store is truly going out of business or truly unwinding unsold inventory, a sale is never really a sale. It's a trick.
You do this with your customers too, right? But don't feel bad. This is not illegal. You know this. It's a tactic that's been used by savvy business people since there have been savvy business people. From the biggest corporations to the smallest retail shops. When it comes to pricing their products smart business owners know how to play this game. Do you? Let's see…
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For starters, do you listen to the consultants that warn you to never lower your prices? Because if you are, you're making a mistake. Chances are your consultant has never run a small business…which is why he's probably a consultant. Of course, you should discount! Not all the time. But running a business is all about negotiating prices for stuff you buy and sell. From fish markets in Istanbul to boardrooms near Wall Street, every great business person I know also knows how to offer incentives to catch the next fish. If the customer is big enough or you want the deal bad enough then you lower your pricing. People do this all the time. If done the right way you're not de-valuing your product or services. You're not showing weakness. You're doing what you need to do to get the deal done (and hopefully at a profit…see below). Don't feel guilty. You are doing what smart business owners do.
Do you have a list price for everything? You should. Even if that's not what you ultimately charge, your customer likes to know that he's getting a discount -- even though it's not a discount because you never expected to get it anyway. But whatever…it seems to work. Plus, sometimes when the moon is aligned with the stars, you just might get that list price for your product or service and that's good too. You're not taking advantage. It's only offsetting the low, low prices you were forced to charge to those few customers who really bargained you hard. It all evens out in the end.
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Do you have jerky customers? We all do. But they should pay a premium, don't you agree? I had a client who would work up a job based on his standard prices and then figure how much he needed to discount to get the deal. But for a select few of his customers he didn't discount. He added a surcharge. When I asked him what that was for he called it his "A-Hole Tax." C'mon, admit it: we're all prostitutes. I'd sell to Satan himself if it means making my month's quota. But that doesn't mean I'd charge him the same price as my best customer. For those certain customers (and you know who they are) that are likely to be those very special pains in the you-know-what, don't discount. Charge more. These are the people that kill your profits. Give discounts to the people that will continue to give you more work and are the lowest maintenance.
Do you discount a little too much? You shouldn't. If you're in retail and you're going to have a sale, then do it a few times a year. But don't be one of those shops where the same "40% Off" signs are permanently pasted all around the shop. This is flagrantly saying that you're BS-ing us about your list prices and you just don't care. If something is always going to be 40% off then the price is 40% too high. There's nothing wrong with a periodic sale. Just do it periodically.
Are you focusing on your margins? Because that's where the money is. The selling price is actually not your concern. Your profits are what you care about. Our standard rates for technology services are $175 per hour (and do NOT be shocked by this because I just paid my plumber an amount close to this just last week!). But know this (and I hope no clients are reading): this is just the rate that we're trying to get. It's not written in stone. I know that I need to earn a certain dollar per hour in order for the job to be profitable. I know this because I look at my overhead every month and calculate what my cost per hour is company-wide. So even though I'm trying to get $175 per hour, I know that if the job is big enough, the customer is right, and the potential is there I can bring that rate down and still make a profit. In other words, I know my margins. And so should you.
So go ahead, have a sale. Give a discount. Be a sport. But know that you're just playing a game of pricing. And you're participating in an age-old tradition.
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