E-Class #48: How to Stop Discounting and Increase Sales

Checkpoint:

You have reviewed your current pricing strategy, and identified where it needs to be updated or modified.
You have created a comprehensive pricing strategy for your business that reflects your overall objectives and optimal product and service positioning.

Discounting is often used as a lead generation tool, or lure prospects or to drive sales.

As you likely know, a deep discount can serve as a powerful draw for old and new customers alike. Consumers love a “deal” – they love it when they can get more for less. They especially love with they can get the same product for less than others have paid for it, or less than other companies are offering it for.

So, a lot of business owners rely on the power of discounting to get people into their business, and to convert customers. They use discounts in their headlines, powerful offers, promotions and guarantees.

While there’s nothing wrong with this, I find that it’s a lazy strategy. Instead of creating an offer specific for a target market, they slash some of their prices and wait for the drove of customers to come flying through the door.

And the problem with that is the bottom line. Discounting is often an ineffective strategy because it offers too little – if any – return on investment. It also draws discount customers who many never actually pay full price – an unprofitable customer.

In this E-Class we will cover:

The purpose of discounting in your business
How discounting can hurt your bottom line
How to discount and still make money
When and how to discount
Checking in on costs and revenues

Discounting could be hurting your bottom line more than you know.

How often do you run the numbers before you run a discount promotion? Is the discount based on your profit margins, or on a figure you pull out the top of your head? Like every other strategy you implement, you need to be making more money than you spend, and when you discount, you spend some of your profit margin.

Discounting can also impact your business beyond the price of the product itself. There are greater potential consequences that you may not be aware of. Here’s how discounting can affect your business in an adverse way:

Discounting makes you less money than you think.
Discounting attracts the wrong customers.
Discounting affects the way your customers see your business.
Discounting can create a price war.
Discounting eats into your profit margins.
Discounting can cause customers to wait for reduced prices

I usually advise my clients to consider all other options before diving into a discount strategy. Often, there are other more profitable ways to achieve the same objectives. Discounting works because customers feel they are getting more value for less money. However, there are many ways to increase the value/price ratio of a product without decreasing its price, such as product/service widgets and bonus offers.

Let’s take a look at discounting by running some numbers.

Ultimately, business owners look to discounting to help boost income. More people in the door, more sales, more money, right?

Not so fast. Depending on the discount, you could be working really hard just to maintain the sales status quo at your business.

Here’s a really basic online calculator that you can use to compare discount strategies:

http://www.calculatenow.biz/business/discount.html

For example, let’s take a look at a simple 10% discount. Let’s say my average monthly sales are $100,000, and my product costs ran at about $25,000 with operational costs at $10,000, and my usual net profit is $65,000, which is a pretty substantial profit margin.

If I chose to discount my offering by 10% in a month and sales volumes stayed level, my sales would come in at $90,000, and net profit would be $55,000 after costs – a 15% decrease. To maintain my sales of $100,000 per month, I would have to see an increase in volume of about 15%. Therefore, to increase total revenue by 10%, I’d have to see an increase of 25%.

With a profit margin of 30%, the same 10% discount would require a 25% increase in sales volume to maintain that status quo, and more to increase revenue. You’d have to increase sales by nearly a third, just to stay in business! Also note that these simple calculations don’t include any increases in costs, which are likely if your sales volume increases.

So, discounting can demand some pretty impressive increases in sales before it can start making you money. Why would you work harder for no reward?

Discounting impacts perceived quality – of your product, service and of your business.

Giving your customers a discount might seem like the right thing to do – especially in tough economic times when you really need to bring people in the door. You’re searching for a way to increase sales and generate new leads. The competition is fierce, and a lower price seems like the only way to stay in the game. Like I said above, people like bargains. They like getting more for their investment.

However, as I explained in the E-Class on pricing strategies, the price of a product or service communicates a message to the customer about quality. When the price is discounted, you run the risk of giving the impression that the product or service is out of date, of a low quality, or undesirable by others.

When a customer is looking for quality, they’re prepared to pay a higher price, and often make their decision based on price when looking at a range of comparable items. Especially, as I’ll explain in the next section, when it comes to luxury goods.

If you have a customer base with a high average income, who shop in your store for the quality of your offering, you may not have much to gain with a discount strategy.

So, can you use discounting as a marketing strategy and still make money?

The answer here is yes, and no. I’m not trying to say that you should never discount. It’s a matter of HOW and WHEN you discount.

The purpose of all of the strategies I have been teaching you is to make money. We’re trying to dramatically grow your business through five different areas of your business, so that the cumulative effect is amazing wealth creation. Discounting has a place within these efforts.

In this E-Class, I’m trying to cultivate your awareness of the true impact of a discount strategy, and then teach you how to do it right. You need to discount with knowledge of your numbers, instead of a short-sighted desire to get customers and close sales.

I mean, even luxury retailers discount their products. I mentioned Gucci earlier, which offers discounted merchandise at the end of each season through their customer emails. However, the offer of a discount is a marketing strategy designed to a) move old product, and b) appeal to a particular segment of their market. This is the group of people who would not otherwise afford or be willing to buy their merchandise. Their core clientele would not be won over with discounts, since their interest lies in the quality and prestige of the brand.

In this case, discounting is a highly effective strategy for a company that can afford to discount. Luxury goods generally have a high-markup or profit margin, and can stand to take a cut on last season’s lines.

So, with that in mind, here’s a pro’s guide to strategic discounting:

1. Decide why you’re doing it.

Surprise, surprise. Just like the rest of what we’ve been talking about, this strategy starts with a clear understanding of your objectives. How else are you going to know if you’re successful or not?

Notice that all of these objectives are short-term objectives. Unless you’re looking to establish yourself as a discount retailer, there is a short-term need that discounting will meet. Make sure that you’ve exhausted other options that may preserve your margins.

Here are some of the objectives you may have for a discount strategy:

To generate leads. If you’ve seen a dip in lead generation, you may want to use a discount promotion to attract new prospective customers.
To increase sales. If increasing sales is your objective, make sure you have reviewed other strategies for achieving this objective. It can be very difficult to increase your overall revenue with discounting, since your increase in sales volume needs to cover your costs and loss of profit margin.
To move old product. Discount out-of-season merchandise and products that are nearing their expiration date. This is to save you the cost of storing the items, and to cover the cost of initially purchasing the items.
To lure back old customers. In this case, you’ve already paid to acquire the customer, so you have a bit more room in your margins to discount.
To promote a new product. If you have just launched a new product line, and are ready to tell your customers about it, you could use a short-term discount to encourage people to try it out. Or, to compete with other companies who may be carrying the same line and increase your market share.
To save fleeing customers. If your competition is offering lower prices, and you’re losing customers, you may need to win the price war in the short term. However, an added-value strategy may be more effective (and healthy for your profits) at keeping your current client base.
To increase average dollar sale. Offer a discount on all purchases above a set value to encourage greater spending. Price this value at 30% above your current average dollar sale, and offer a 10% discount. You’ll have a guaranteed increase in average sales.

Remember that if you discount too long, you run the risk of either acquiring customers that will never pay full price, or an inability to compete with other businesses. And, at the end of the day, if the demand for the product isn’t there, even an 80% discount won’t be enough.

2. Determine what you can afford.

Run the numbers using the calculator above, and see what kind of sales volume increase you’d need to account for 10%, 15% or 20% discounts. Ask yourself if that target is realistic, based on your knowledge of your average sales volume and the way your customers typically respond to special offers.

Be honest with yourself – especially if your true goal is to increase revenue. If you are aiming for a 10% increase in sales, but sales volume has to increase by 30% to get there, there are probably better strategies out there. But, if you’re trying to get rid of old merchandise, and a 30% reduction in price only requires a 10% increase in volume to cover costs, then that’s a realistic target.

Or, as I suggested above, when you need to boost your average dollar sale, make sure that the amount you require customers to spend is high enough to account for the discount and still include an increase in revenue.

It can be helpful to establish a minimum profit margin, or an average daily profit margin, so you can be assured to cover your overhead costs and have a clear measuring stick while you evaluate the merits of different discount strategies.

Remember that you always have options.

Consider whether you need to offer the discount to your entire market, or if you can segment it and limit your offer to those who need it. For example, an offer to existing clients or members of your customer loyalty program could serve your objectives without going to the public.
Do you have to offer a discount to stay competitive, or can you create new product lines that will have a longer-term impact on the competition and increase your market share?
Can your market afford what you’re selling right now – regardless of the discount? You need to time your offer so that it hits when your customers have the money to spend. January is a terrible month for most consumers, so your discounts will be focused on moving old stock, not increasing sales volume.

3. Give your employees a clear idea of what the bottom line is.

If your sales team has the ability to offer discounts, you need to be clear about the bottom line and how the price will impact not only their commissions, but the overhead of your business.

It’s easy to want to give just a little bit more discount when you’re about to close a sale, but unless the sales rep truly understands the structure of the pricing, they could be giving away their commission. Educate them on the complete picture of pricing in your business, and they’ll have a better handle on what they can offer.

When you’re running a discount promotion, be sure to educate your staff on what the discount is and why you’re offering it. When they can offer an explanation to the customer about the discount – for example, it’s on sale because it’s last season’s clothing line – your customer will understand that the discount doesn’t reflect a compromised quality.

Also, if the staff who run your point of sale have the ability to discount and price match, make sure there is a maximum dollar value that they have to work with before a manager’s approval is required. While empowerment is a great management and customer service strategy, if your cashiers have the ability to discount up to $50, the impact could be negative.

4. Decide on a form of discount that will suit your purpose your and budget.

Now that you know why you’re discounting and what you can afford, you can create your discount. Think about how you need to structure it so that you can successfully market it to the desired audience.

Ask yourself the following questions when making your decision:

How deep does the discount need to be to have the desired effect?
How much can you afford to discount?
Do you need to discount all products equally?
Can you use coupons to “code” the offer?
Is the discount conditional?
How do you need to structure the discount to achieve the desired perception?

As a general rule, try to get away with the lowest possible discount. Often, 10% is enough to motivate customers to buy now vs. later, or now vs. now at all.

If you’re looking to move product quickly, use the biggest discount you can afford. In this case, you’re just trying to recoup your costs, so a deeper discount will encourage faster sales.

Lastly, make sure you give the discount a time limit to create urgency and manage perception. Discounts should be a limited time offer, not a standard practice.

5. Test and measure the your results to evaluate the success of the campaign.

Keep track of all the sales generated by the discount offer, as well as your costs to provide and sell those items. It is important to track these numbers so you can evaluate the success of your discount strategy, and decide if you have achieved your objectives or not.

You need to evaluate and decide if:

a) Your sales cover your costs, and
b) The increase in sales volume compensated for the decrease in profit margin.

Weigh this against your objectives. Certain objectives – like getting rid of old stock – will be evaluated not on profit, but on how many units were sold and whether or not costs were covered. If your objective was to drive sales, make sure you made money.

There is a time and strategic reason for discounting in every business, just be careful it doesn’t become your all-the-time strategy.

Like everything in marketing, there really aren’t any hard and fast rules about discounting, and it isn’t reserved for discount retailers. I mean, even designer brands like Gucci offer discounts at some time or another.

My goal here is to snap you out of using discounting as your catch-all solution to lead generation, and approach it with the same level of strategy that you would for your other marketing efforts. At the end of the day, if it’s not making you money, it’s not a successful strategy.

Next week we’re going to dive into your business operations, and see what we can streamline to make your life easier. You don’t want to be working in your business forever, do you?

Have a great weekend!