Peak Your Profits: Discount dilemma or ouch impact
Value can be created in countless ways. However, there’s a big difference between value and discounting, simply to make the sale. I’m not telling you not to negotiate, but it’s essential you truly understand the impact of a price reduction on your long-term business relationship, career and bottom line.
Let’s imagine your 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 sale 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 to give 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! (To see me explain this frightening reality, please head to www.jeffblackman.com/results-tv/ then click on “Jeff Blackman interviewed on: Value vs. Price!”)
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; guarantees credit; increases market share; offers higher exposure to a new business/market; secures long-term commitments; gets “foot in the door;” generates positive exposure with high-profile account; increases utilization during a slow time; keeps business we may have 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 create loss of trust; generates “low-baller” perception; creates an image of an inferior product/service; creates equipment shortages; causes hassles from management; reduces company image to level of competition; makes sales people 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.
The preceding is an excerpt from the new 5th edition of Jeff’s bestselling book, “Peak Your Profits.” It’s scheduled for a summer release and will be available on Amazon and at your favorite bookstore.
Jeff Blackman is a Hall of Fame speaker, author, success coach, broadcaster and lawyer. His clients call him a "business-growth specialist." If you hire speakers, contact Jeff 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 soon-to-be released 5th edition, of the bestselling “Peak Your Profits.” You can also stay connected with Jeff via Facebook, LinkedIn and Twitter: @BlackmanResults