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Peak Your Profits: Discount dilemma or ouch impact

Jeff Blackman
Columnist

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.

Image source: Getty images.
The answer can be traced to disappointing clinical results from the company's late-stage REGAIN study, released in June. The trial was testing Soliris as a potential treatment for refractory generalized myasthenia gravis (gMC). Positive results could have opened up a whole new group of patients for the drug. Unfortunately, the REGAIN study failed to show that using Soliris led to a statistically significant change in clinical outcomes. That caused traders to bail.
While the news wasn't good, I think the markets have overreacted. In the REGAIN trial, Soliris barely missed proving statistical significance on its primary endpoint, and it demonstrated statistical significance on three of its secondary endpoints. That has led  FiercePharma  to report that some physicians may still opt to use Soliris off-label for this disease because there are no real alternatives. Thus Soliris could still see growth from this indication, even if it fails to win regulatory approval.
Market watchers are still projecting that Alexion will grow its bottom line by more than 18% annually over the next five years. With shares now trading for about 26 times forward earnings, I think right now is a great time to consider getting in.
Acquisitions created a monster!
Daniel Miller :   XPO Logistics, Inc.   (NYSE: XPO) , a global transportation and logistics company, has been a wild growth story over the past half-decade. It put typical acquisition strategies to shame as it gobbled up companies in multiple spaces. It now ranks as the second-largest global provider of contract logistics, the second-largest less-than-truckload (LTL) provider in North America, the second-largest global freight brokerage firm, the third-largest intermodal provider in North America, and the No. 1 last-mile logistics provider for heavy goods in North America.
Just look at what its ambitious acquisition strategy has done for its top and bottom lines:

XPO Revenue (Annual)  data by  YCharts .
One metric that mirrors its top-line growth is its long-term debt, as XPO leveraged its balance sheet to acquire these companies. That's why, at least for now, management is hitting the pause button on its acquisition spree and focusing on generating strong synergies across the board -- something that should beef up the bottom line for investors.
As XPO Logistics operates in multiple sectors ranging from contract logistics and truck brokerage to North American truckloads, 77 of XPO's top 100 customers use two or more service lines. This, in my opinion, suggests that while XPO is taking a break from acquisitions, it can do a huge amount of cross-selling to its customers. That, in combination with cost synergies from recent acquisitions, should spell strong bottom-line growth over the next few years.
Speaking of cost synergies, XPO's chief transformation officer, Ramon Genemaras, has a great track record: He led $1 billion in cost cuts at  General Electric,   Tyco , and  Johnson Controls . XPO management believes the company can achieve two full percentage points of margin improvement in the next 30 months.
XPO Logistics' acquisitions have made it a phenomenal growth story. While they're being put on hold temporarily to generate some juicy cost synergies, reduce debt, and take advantage of cross-selling opportunities, XPO's growth story is far from over.
Brian Feroldi  owns shares of Alexion Pharmaceuticals.   Like this article? Follow him on Twitter where he goes by the handle    @Longtermmindset    or connect with him on    LinkedIn    to see more articles like this.    Daniel Miller  has no position in any stocks mentioned.  Matt DiLallo  owns shares of Phillips 66. The Motley Fool owns shares of General Electric and Johnson Controls. The Motley Fool is short Johnson Controls. The Motley Fool recommends XPO Logistics. Try any of our Foolish newsletter services  free for 30 days . We Fools may not all hold the same opinions, but we all believe that  considering a diverse range of insights  makes us better investors. The Motley Fool has a  disclosure policy .     The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.     Offer from the Motley Fool:   A secret billion-dollar stock opportunity

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 jeff@jeffblackman.com. 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