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Discounting pros & cons, part 2: Are discounts hurting your profitability?

Publisher: Kelly Burkart – Posted on 03/22/2013

The first article in this series discussed the pros and cons of using discounts to stimulate cash flow. The series continues with the effect of discounts on profitability.

It’s true the occasional discount can increase your cash flow temporarily. But what about long-term profitability?

People are always looking for a deal, but you shouldn’t automatically feel compelled to offer a discount. It may sound obvious, but if you already charge a fair price for your goods or services, why should you be asked to lower your prices? Does it make you feel like you’re cheapening your product? Will it undermine your confidence in your business if you are always lowering your price to get a sale or a job?

Perspectives on discounting

How do your customers, employees and competitors look at discounting? It’s helpful to consider the issue from different perspectives to protect your bottom line.

  • Customers. If some customers always expect a discount, are they the type of customers you really want? Avoid clients who consistently want to nickel-and-dime you into a lower rate and promise to pay your regular rate “next time.” It won’t happen, and in the meantime, your profitability takes a hit.
  • Salespeople. Sometimes salespeople are too quick to offer a discount thinking it’s the only way to close a sale. But they may be underestimating a customer who feels they’re already getting a fair price. If a customer or prospective customer can’t pay your price or doesn’t want to, is this the type of customer you want?
  • Competitors. If your competitors get wind that you’re offering discounts (and you know they will), they will follow suite and soon you’ll have a price war to contend with. Which means profits could continue on a downward path till one of you is out of business. Some of your customers may tell you the competition offered them a lower price. Let them take it. They’re probably saying the same thing about you.

Think positively and profitably

Don’t waste time on clients who will never value what you do. Instead, devote more time to cultivating clients who are willing to pay what your product or service is worth. They are the ones that will refer you to other good customers.

It may seem counterintuitive, but rather than discounting, think about raising your prices or rates. As you gain experience and your reputation grows, it only makes sense to raise your prices. Add more value, rather than cutting prices

Use discounting as a tactic, not a strategy

A major department store’s recent discounting experiment is an example of what happens to profits when discounts take over. The chain offered a steady stream of discounts, coupons, and sales to try and compete with big box stores. In an effort to change this strategy, management announced a new policy of across-the-board, everyday savings without coupons or constant sales. However, discounting was so ingrained in customers they didn’t buy this new approach, and soon profits began to suffer. The department store quickly retreated and was forced back into discounting.

Concentrate on the value you offer your customers that makes you stand out, and you’ll grow your business more than by selling yourself short.

 

Kelly Burkart is a freelance writer from Minneapolis, Minn. While she has spent most of her time writing about financial services the past 15 years, she has also explored and written about everything from cardiovascular health to travel, higher education and sustainable energy practices.

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