Discounts vs Profits – How discounting affects your bottom line.
Do you have (or have you ever experienced) one of those salespeople who thinks that giving a discount is the easiest, quickest way to make a sale? Of course, they may be right, but what about the profit (your profit) they’re giving away?
If your product has a profit margin of 30% and your salespeople give a 10% discount to make the sale, you’re losing a massive, one-third (33%) of the available profit!
During a seminar for the buyers of a large retail group with branches all over the country, an attendee shared the following tactic: “My job is easy. I just let the salesperson make a full sales presentation. I ask questions and listen to their explanations. When they’re finished, I simply say, ‘I’d like to place an order with you, but your prices are too high…’ and I then simply sit there and enjoy myself, because the once-confident salesperson suddenly doesn’t know what to do or say next. With much less conviction and enthusiasm, they may repeat the benefits and features of their products, but most of them get in to see me by giving me a lower price in the first place. Whatever new price they offer, I usually respond by saying, ‘You’ll have to do better than that!’ And more often than not, they do…in fact, do better than that! I get lower prices by just sitting there, enjoying the game!”
If you are selling, or have others selling for you, you must protect your price and your margins. Teach your sales people to talk about the unique benefits of buying from you, and not to hesitate or stutter when a buyer insists on a lower price. Start negotiating! Start using tactics to hold firm on your prices. Sell value…perceived and real
Here’s Why:
Do you think it’s possible to work 50% less and earn the same income from selling? You bet it is! Here’s how:
Suppose your company sells pumps, with selling price of $10,000 per unit. Assume that your net cost per pump is $7,000. That means that the net profit on each pump would be $3,000. If you sell ten pumps at the full price, the net profit for your company will be $30,000.
Compare this with selling ten pumps, but this time at a discount of ten percent. The total selling price for ten pumps is then $90,000. The net cost for ten pumps remains at $70,000. The net profit has decreased to only $20,000 compared to the original transaction $30,000 where no discount was given. With only a 10% discount you’ve just lost one-third of your profit.
If your company continued to sell at ten percent discount, then you’d have to sell 15 pumps to achieve a net profit of $30,000. Here’s how it looks:
Sales Discount Gross Sales Net cost Profit
10 0% $100,000 $70,000 $30,000
10 10% $90,000 $70,000 $20,000
15 10% $135,000 $105,000 $30,000
What lessons can you learn from this example?
A ten percent discount means your company must sell 50% more units (15 instead of 10) to earn the same profit dollars.
A ten percent discount means someone has to work 50% harder to earn the company the same dollars.
By not giving discounts, in essence the company can “work” 50% less and earn the same income.
In spite of this, you might still think, “But, if I don’t give discounts, I’ll lose sales! It’s an industry norm to give them…everyone does. If I don’t give discounts, they’ll go to the competition!”
And you may, of course, be right. You may lose a few deals if you don’t give discounts… but the good news is you can afford to…and still make the same or more profit. OR, you can work on your Unique Selling Proposition so that your customers see the value you uniquely offer, and are willing to pay for it.