In this feature, Melissa Jacobs explains the impact discounting can have on your bottom line.
In the marketplace, prospective buyers may throw a price objection at a salesperson, often leaving that salesperson scrambling for a quick response. An inexperienced or unskilled salesperson may just agree to drop the price then and there, and a more experienced salesperson will confidently hold their price. Buyers are savvy in using this tactic, and whilst discounts do have their place in certain scenarios, salespeople must take care to not just drop their price as this can have far reaching implications on the business profitability, as demonstrated further below. Price is what the customer pays, value is what they get. As soon as the customer perceives that the price is higher than the value, they don’t buy. They have to perceive the value to be equal or more than the price, in order for a sale to happen. Salespeople need to ensure that they are highly skilled in explaining and demonstrating the value to the customer.
Let’s take a look at the implication on the numbers as a result of discounting.
If a product has a profit margin of 30% and the salesperson gives a 10% discount to make the sale, the company loses a massive one-third (33.33%) of the available profit. Assume something sells for R10 000 and has a R3 000 gross profit. If we give a R1 000 discount the selling price will now be R9 000 and the profit reduced to R2 000. We have given away R1 000 profit, now divide that by the original profit of R3 000 and that is 33.3% of the profit that has just been given away.
The scary part is that in order to get the R1 000 profit back, you will need to increase your sales by 50% (R4 545) considering that you are now operating on a 22% Gross Profit.
Business owners and their salespeople must do their best to protect their price and margins. It’s important for businesses to invest in teaching sales people not to hesitate or stumble when a buyer insists on a lower price, and to rather equip them with negotiating tactics that will help them hold firm on their prices. This also boosts a customer’s perception of the product or service’s value. It is much better to rather add some sort of value add instead of giving a discount.
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Tags: bottom line, business, discounting, How Discounting can Harm your Business, MJ Accountants