I’ve been coaching a client who has a product that almost everyone needs. She is competing with a number of other providers in her area. One of those has been established about 12 years longer than her business and has built up a set of loyal clients.
The issue is that my coaching client has been competing on the basis of a “better” price for some time.
And of course a better price is a discount on what they provide.
In my opinion discounting can be very bad. For the following reasons:
- It trains your customer to expect a lower price than that advertised
- Doesn’t breed loyal customers, price sensitive ones simply go elsewhere if you put prices up
- You’re losing money on what you could have had if you’d offered something else of value
- You need to make much more sales to cover the money lost by discounting
Let me demonstrate the dangers of price cutting for your business with a table that shows how many more units (as a percentage) you need to sell to earn the same original gross as you had with the previous selling price:
|Cut price by %||10%||15%||20%||25%||30%||40%|
As you can easily see cut your prices by 8% and if you’re on a 10% gross profit and you need to sell 4 times as many units (ie 400%).
Discounting can be good if it hugely increases the numbers coming to buy from your business and to buy in larger volumes so that the net profit of a transaction is larger than for the net profit for non-discounted items.
So looking at the table again if your gross profit was 40% and you cut your price by 8% you need to sell 25% more units for the same gross profit as non-discounted units. So if you sell 50% more units you’re making more money than if you hadn’t discounted.
The only fly in the ointment is that you need to test whether discounting works for your product. You can use the table to see whether the sales you’re making work.
When you’re a new business you do offer price reductions to “bribe” your customers to try you out. You must make that clear to them unless you intend using discounting as a strategic marketing tool.
My Advice: Don’t use discounts to compete with others. In the end it’s likely to end in tears. There’s a better way…
And that way is to add services, products, anything that will add value to what you provide. Package them up and sell them to your customers. That way price comparison becomes almost impossible. So the price war stops dead in its tracks!
In another post I’ll explain exactly what we we did with this client to increase sales without discounting.