Do you have a salesperson who believes offering discounts is the quickest way to close a sale? They might be right regarding speed, but have you considered this approach’s significant dent in your profits?
Consider the impact of a 10% discount on your product/service, which already boasts a healthy profit margin of 30%. If your salesperson decides to offer this discount to secure a sale, your business stands to lose a staggering one-third of its potential profit! To put this into perspective, selling 100 of your products/services at the original price would yield a profit of £ 300,000 [£ 3000 x 100]. However, if you offer a 10% discount, you must sell 150 of the same product/service to make the same profit. That’s like giving away a third of the product/service for free, a strategy that’s clearly unsustainable.
The Real Cost of Discounts
During a seminar with buyers from a prominent retail group, one attendee revealed their tactic: “I let the salesperson complete their pitch, then I say, ‘I’d like to buy, but your prices are too high.’ This is a common objection that salespeople face, and it’s often used as a negotiation tactic. I sit back and enjoy as the once-confident salesperson scrambles to offer a lower price. Most often, they do exactly that, and I get my discount.” This anecdote underscores the importance of effectively training your salespeople to handle price objections.
This tactic highlights a crucial point: salespeople often cave in too quickly. But you don’t have to.
Protecting Your Profits
Protecting your pricing and margins is vital if you or your team are selling. Train your salespeople to negotiate without hesitation when faced with price objections. Emphasize the perceived and actual value of your products or services. Perceived value is the customer’s opinion of the product’s worth, which can be influenced by factors such as brand reputation, product quality, and customer service. By highlighting these aspects, you can justify your higher prices and maintain your profit margins.
Why It Matters
Consider this scenario: Your company sells pumps at £10,000 each, with a net cost of £7,000. The net cost is the total cost of producing the pumps, including materials, labour, and overhead. The profit per pump is £3,000, which is the selling price minus the net cost—selling ten pumps at full price yields a profit of £30,000.
However, if you discount each pump by 10%, the selling price drops to £9,000. Selling ten pumps at this discounted price brings in £90,000, but with the same net cost of £70,000, your profit falls to £20,000.
To achieve the same £30,000 profit with a 10% discount, you’d need to sell 15 pumps instead of 10. Here’s the breakdown:
Sales Discount Gross Sales Net cost Profit
10 0% £100,000 £70,000 £30,000
10 10% £90,000 £70,000 £20,000
15 10% £135,000 £105,000 £30,000
Key Takeaways
– A 10% discount necessitates selling 50% more units (15 instead of 10) to achieve the same profit.
– A 10% discount means someone has to work 50% harder to earn the same profit for the company.
– By avoiding discounts, your company can essentially “work” 50% less and maintain the same income. This not only protects your profit margins but also opens up the potential for increased profits.
Addressing Common Concerns
You might worry that not offering discounts could lead to lost sales, especially if discounts are standard in your industry. While you might lose a few deals, the good news is that you can afford to. Even with fewer sales, maintaining your pricing can lead to equal or more significant profits, providing a sense of security and confidence in your business’s financial stability.
Conclusion
In the competitive world of sales, holding firm on your pricing and emphasizing the value of your product can significantly benefit your business’s bottom line. Teach your sales team the importance of negotiating without automatically offering discounts. This approach preserves profit margins and positions your product as valuable and worth its full price, instilling confidence in your pricing strategy.
