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The Effects Of Discounting

“All customers are equal.”
“All customers are equally important.”
“All customers deserve the same service.”
“It is not fair that some customers get better prices than others!”
“All customers deserve the same price.”

Maybe you’ve heard a salesperson say one of the above statements. Strange as it may seem, many sales and service people have this view. When you hear that all customers deserve the same, you almost immediately know you have a Marxist/Socialist version of something or other. You also know that, most likely, the company is facing difficulties and is, at a minimum, struggling to be profitable.

It is true that customers are important, but you cannot give A-class resources to a C-class customer unless you want to go broke. Customer differentiation is critical to companies that have to survive on margins (which includes all companies wanting to earn positive profits).

Controlling pricing to achieve differentiation is one of the great challenges in running a sales force. Try this one: Tell your salespeople prices are going up but differently for each class of customer, and they will scream that it is the wrong move, that you are going to lose customers, that they will resign because of the “dumb management,” and so on.

Selling for Profit
Other people inside companies come into contact with customers, and they too can affect the prices obtained. This may not be face-to-face but, nevertheless, it affects the final outcome. Much of this is selling on the phone and is relatively unsupervised by upper management.

Customers also phone warehouse staff, delivery personnel and account staff, and there is a chance every time that a price alteration could occur. Which way do you think it occurs? Is it upward in favor of the company, generating more margin, or downward in favor of the customer, who achieves better savings? You got it, 99 percent downward! Once again, this shows the drive for competitive advantage by increasing market share and the mentality of indiscriminate discounting that exists in society and business.

Exhibit 1 charts the effects of discounting on margin. Run across the top line of numbers to 40 percent margin and then go down to the 10 percent discount bar. For a 10 percent discount in a 40 percent margin company, you will need to increase your sales volume by 33.3 percent.

The Effect of Discounting

Sales staff, in particular, have to see some clients repeatedly and want the easy way out when under pressure. After all, these people are friends with whom they have a relationship. The last thing the sales team wants to sell is a price rise. They’d rather go and sell double the volume than negotiate a price rise. However, to achieve the profit your company needs, you must have them all on the same side at the same time and set some price controls. How?

Achieving Profits
From the customer’s perspective, really good deals give away the whole net profit and make them ecstatic. If there is 10 percent net profit in the product, and you empower the sales staff to discount up to 10 percent, how much will they use? The whole 10 percent, every time! There goes your net profit.

The world’s most popular discounts are in the 10-20 percent range. In fact, 10 percent is the most popular discount level. Why? Nobody knows. (I think it is because we have 10 fingers.) However, there is no scientific explanation as to why the 10 percent discount is the most popular.

If your salespeople can discount up to 10 percent, how much will actually be used? You think 10 percent, but they usually want more. Don’t they go to the boss and ask for one percent or two percent more? I have experienced some of the best selling in my life in my own office, all the while wishing the same sales effort was going on with the customer! Senior executives have to say no. When you say no, give the reason why.

The pecking order can be like this: The sales staff discounts up to 5 percent, then the sales manager can go up to 10 percent, and the vice president of sales to 15 percent. Once customers find this out, they start a process that gets them into the vice president’s office to get that 15 percent off. The smarter ones go even further and say, “If I can get 15 percent from the vice president, let’s see what the CEO will buckle at!”

Pressure is always on sales staff to do deals. It is an ever-present reality that buyers and purchasing agents are trained to use a myriad of traps to seduce a salesperson into discounting. We live in a “discounting” society, as demonstrated by television advertising. This downward pressure on prices is a game we all play daily. Therefore, it is necessary to establish proper pricing controls.

Material Handling Equipment Distributors Association
Graham Foster Meet the Author
Graham Foster is the author of The Power of Positive Profit (John Wiley & Sons, 2007), and is based in Phoenix, Arizona.

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