“Always deliver more in perceived value, than you take in actual cash value.”
16. The Discount Dilemma or OUCH Impact!
Remember, value can be created in countless ways. Later, we’ll talk about your values checklist and how it relates to the negotiation process. However, there is a big difference between value, psychic debt and discounting simply to make the sale. I am not telling you not to negotiate, but I think it’s essential that you truly understand the impact of a price reduction on your long-term business relationship, career and bottom line.
Let’s imagine that your non-sale product or service regularly sells for $100 and the cost of sales is $75. Therefore, your gross margin is $25. Now, what happens if you cut your price?
Let’s say you trim your price by only 10 percent. Therefore, your new price is $90. Your cost of sales though, is still the same $75. And $90 minus $75 equals a new gross margin of $15.
You might be thinking, “That’s not a big deal, I only gave up 10 percent to secure the deal.” But with a 10 percent price reduction, how much new business must you bring in, to regain the lost margin?
Believe it or not, to regain the lost margin, you’ll have to get additional business of almost 67 percent! OUCH!
And if you cut your price by 15 percent, you must get additional business of 150 percent! OUCH! OUCH!
When I ask workshop participants, “Why would you want to discount? What might the advantages or disadvantages be?” Here’s how they respond:
Advantages of discounting
- gains new accounts
- generates long-term business volume
- provides credit guarantees or prompt payments
- increases market share
- offers higher exposure to a new business/market
- secures long-term commitments
- gets “foot-in-the-door”
- creates positive “exposure” with a high-profile account
- increases utilization during a slow time
- keeps business that may have been lost
- takes business away from competition
Disadvantages of discounting
- reduces profits
- creates negative impact/perception on existing business
- lowers company’s value to prospective customers
- makes it hard to raise prices later
- starts a bidding war
- erodes margins
- may sacrifice availability
- may sacrifice reliability
- lowers revenues
- lowers commissions
- may cause loss of trust
- creates “low-baller” perception
- conveys an image of an inferior product/service
- causes equipment shortages
- creates management hassles
- reduces company image to level of competition
- makes salespeople lazy
- jeopardizes quality
- turns products and services into a commodity
- sets a scary precedent for future business
Remember, a price reduction may cause you to work harder, not smarter. Plus, price wars can be demoralizing, exhausting and unprofitable!
© Blackman & Associates, LLC
Jeff is a Hall of Fame speaker, best selling author, success coach, broadcaster and lawyer. His clients call him a “business-growth specialist.” If you hire speakers, please contact Sheryl Kantor at: 847.998.0688 or firstname.lastname@example.org. And visit jeffblackman.com to learn more about his other business-growth tools and to subscribe to Jeff’s FREE e-letter, The Results Report. Jeff’s books include; Stop Whining! Start Selling!, (an Amazon Bestseller), and the revised 4th edition of the bestselling Peak Your Profits. You can also stay connected with Jeff via Facebook, LinkedIn and Twitter: @BlackmanResults