the dangers of discounting and how to avoid it€¦ · » find out exactly how much discounting...

The dangers of discounting and how to avoid it

strategy guide

W www.bsi.com.au P 1300 137 504

E [email protected] A Level 7,14 Martin Place Sydney NSW 2000

©2016 BSI. All Rights Reserved

Increase your sales and profits

©2016 BSI. All Rights Reserved 1

Table of contentsA. Introduction ................................................................................................................................................ 2

B. The dangers of discounting explained ............................................................................................................2

Why do business owners think price is the biggest issue? ............................................................................... 4

5 Additional price-related mistakes that businesses commonly make and how to avoid them ............................ 5

How is discounting affecting your business? ................................................................................................. 6

C. How to stop discounting and increase your profits .......................................................................................... 7

4 Ways to avoid discounting and not compete on price ................................................................................... 7

Which is more valuable? ............................................................................................................................... 8

A word of warning on discount promotions .................................................................................................... 9

The exception: when reducing your profits is a great idea ................................................................................9

D. Summary of key points .................................................................................................................................9

E. Your action plan ......................................................................................................................................... 10


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A. IntroductionInside this Strategy Guide you will find out more about the danger of discounting and the disastrous impact it has on your bottom line.

» Discover how important price is (or isn’t) to customers

» Find out exactly how much discounting affects your profitability

» How to outsell your competitors without competing on price … even in a price sensitive market.

B. The dangers of discounting explainedOne of the biggest issues that business owners and managers have is around how to price their products and services. With that, there’s a fear in the marketplace that the only thing that is important to a customer is price.

The reality is, most people DON’T purchase on price.

Sure, price, or rather, value for money is important to a customer but price is NOT a driving factor for most people.

It’s just one element that plays a role in whether or not they will buy.

So - what DO buyers want?

Before we answer that question take a few minutes to consider what is important to you when you go on a shopping trip. For instance, what do you look for in a car?

Do you just want something that is the cheapest on the market … regardless of what it looks like, drives like, sounds like, feels like?

Probably not.

You’re probably looking for something that you like the look of. Something that you feel good driving.

Something that has a good resale value. And something that offers you great value-for-money. A great warranty. Great after-sales service. In other words, something that offers great quality in comparison with its price tag. And a whole host of other things. Yes?

Well, what about when you buy clothes?

What do you look for? Would you go shopping for, say, some clothes for work, and buy something just because it’s 50% cheaper than anything else, even though it’s 3 sizes too big, is in a hideous colour that you hate, and the fabric makes you itch?

Chances are, you wouldn’t, would you?

Price is just ONE of the factors that people consider when they are making their mind up.

They also look for service, advice, support and quality.

The issue of price has always been a hot topic. So much so that numerous studies have been conducted to determine how important it really is in the eyes of customers.

Let’s look at the result of one of those tests.

In the search for some answers, one such survey has looked, perhaps more importantly, at why customers don’t buy from you or why they leave you and move to a competitor.




Survey respondents were asked this question:

‘Why do you choose not to deal with a business or to leave a business and go to a competitor?’

The results were astounding:

Percieved indifference

Product / Price / Time

Miscellaneous

Relationship at high level

Convenience

It found that just 3% of people would leave a business if it was more convenient to purchase elsewhere.

9% of people said they’d leave because of the relationship they had with the person they were dealing within the business. In other words, if their favourite hairdresser left and started working for the competition, 9% of people would follow that hairdresser.

Then here comes the significance of price...

15% of customers would leave a business is they can’t get the product they want at the price they want at the exact time they want it.

But – an overwhelming majority of people, a significant 68% leave a business because the owners or team members of that business are indifferent towards them. What they mean by indifferent is that they give the impression that they couldn’t care less about their needs or about whether they purchased or not.

What does that mean?

It means that only 1.5 in 10 people are price shoppers.

In “Guerrilla Marketing Weapons” by Jay Conrad Levinson, the author mentions yet another survey that shows that people aren’t primarily focused on price.

In it, the author says that only 14% of people consider price to be a prime influence over a sale. The biggest issue was confidence in the company, then quality, then service - selection and price came in 9th! That meant that 86% of people found factors that were more important than price!

Obviously, some industries are more price-sensitive than others and these figures may vary slightly but this survey was completed across a broad range of industries, and in a variety of different countries, featuring people from all market sectors. That means, regardless of your industry price ISN’T the over-riding issue.


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Why do business owners THINK price is the BIGGEST issue?

1. Most businesses promote price too heavily in their advertising.

They focus a little on the features of the product and then focus heavily on the price. The result of that is that business owners and managers are actually training their customers to shop on price.

Because the ads don’t feature a lot of selling information, the only basis for comparison that the customer has, is price.

Instead, if the marketing material focused more on the difference that the product would make to the life of its customer … how it would give them more time off to spend with their family … how it would give them more freedom to do whatever they liked … how it would give them more money to afford those luxuries in life … how it would help them lose weight and get a body like a celebrity etc… if it did that, customers would focus more on the results that the product would deliver and less on how much it would cost them to achieve that result.

2. You’re in a price-competitive industry

Sure, there are certainly industries that are very price-competitive … where they only way to differentiate seems to be price.

The good news is there ARE ways to combat this … ways you can increase your sales WITHOUT being the cheapest on the market.

3. Your salespeople focus too heavily on price.

What do your sales people say when a customer calls or comes up to them at the counter and initiates a conversation by asking, “How much is it?” or “Can you tell me the price of XYZ?”

How do they respond?

Most salespeople respond by telling the customer the price. The customer then says, “Thanks, I’ll get back to you.” (and they never do).

They go off and mentally compare prices on similar products. They ask your competitors the same question and their competitors answer in the same way – by giving them the price.

The end result is that the customer (through no fault of their own) is forced to make a decision based mainly on price … simply because they don’t have any other real information to go by.

But - if they DID know more about the benefits of the products, the decisions they make would probably be vastly different.

Can you see the significance of that?

Business owners, sales people and managers are actually forcing people to shop on price because they’re not showing them how the product will benefit their lives. It’s the business’ fault NOT the customers.

Contrast that with this situation …

Instead, the salesperson could have said,




“Thanks for your call/Thanks for asking. Just so I can help you select the widget that [solves your need] most efficiently and offers you the best value for money, may I just ask you a few questions?”

Or …

“Thanks for your call/Thanks for asking. Just so I can help you select the widget that offers you the best return on your investment, may I just ask you a few questions?”

See how asking that question takes the focus off the price and back on to the real needs of the customer … finding a product that solves a need and offers a high level of quality and results in comparison with the price they pay eg. a great Return On their Investment (ROI).

The sales person would then go on to ask the customer a series of questions to find out what their needs are. And when they had found out the customers’ needs they’d then say something like …

“Based on what you’ve said, [name], it looks like the XYZ product will give you the [repeat needs back to them]. For an investment of just $[price], it [explain benefit], [explain benefit], [explain benefit], [explain benefit]. What’s more, we guarantee that it will give you the results you’re looking for. Anytime within the next 14 days if you find it isn’t living up to your expectations simply bring it back in and we’ll give you a full refund.

5 additional price-related mistakes that businesses commonly make and how to avoid them

1. Potential customers come to your business because they have shown an interest in your business’ product orservice specifically. Don’t invite them to shop around with your competitors.

2. The reason why people always ask the “how much”question ISN’T because they’re shopping around onprice. It’s because they see this as an icebreaker. Theysee it as a place to START the conversation NOT to startAND finish it.

3. By just answering their question and giving them theprice, you’re actually showing that you’re indifferentto them – indifferent to whether or not they purchasefrom you. And remember – 68% of people leaveNOT because of price but because of perceivedindifference.

4. After all, your salespeople didn’t ask them what needsthey wanted fulfilled. They didn’t ask what featureswere important to them in a widget or what they hadseen in the past. Nor did they actually ask for theorder.

5. To make matters worse, when they give that potentialcustomer the price, most salespeople DON’T ask fortheir details so they can follow-up and ask them ifthey’d like to purchase in the future.

When you consider that 8 in 10 people purchase after the 5th contact with a company, it’s easy to see why follow-up (no matter what industry you’re in) is critically important.



How is discounting affecting your business?

The following table shows how detrimental discounting can be on the profitability of your business. More specifically it shows how much you need to increase your sales volume by, to compensate for the discount.

For instance, working on 30% gross margins, and a 10% price reduction, you’d need to increase sales by a massive 50% to experience the same profit levels.

In the eyes of a customer, a 10% price discount is virtually pointless, yet the effect it has on your profitability is enormous.

So – check out the table below and see the effect that discounting has on your profitability, based on your own margins.

If your present margin is…

20% 25% 30% 35% 40% 45% 50% 55% 60%To produce the same profit, you must increase your sales volume by…

And reduce your price by…

2% 11% 9% 7% 6% 5% 5% 4% 4% 4%4% 25% 19% 15% 13% 11% 10% 9% 8% 7%6% 43% 43% 25% 21% 18% 15% 14% 12% 11%8% 67% 47% 36% 30% 25% 22% 19% 17% 15%10% 100% 67% 50% 40% 33% 29% 25% 22% 20%12% 150% 92% 67% 52% 43% 36% 32% 28% 25%14% 233% 127% 88% 67% 54% 45% 39% 34% 30%16% 400% 178% 114% 84% 67% 55% 47% 41% 36%18% 900% 257% 150% 106% 82% 67% 56% 49% 43%20% * 400% 200% 133% 100% 80% 67% 57% 50%25% * * 500% 250% 167% 125% 100% 83% 71%30% * * * 600% 300% 200% 150% 120% 100%

Frightening, isn’t it!


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C. How to stop discounting and increase your profits

4 ways to avoid discounting and NOT compete on price

First, it’s important to consider whether you’re in a price competitive industry.

1. Improve your customer service

When you offer such an amazing level of customer service that your customers literally go “wow” when they’re on the receiving end of that service, you’re winning hearts. And when you win those hearts, price is the last thing on their minds. Figure out ways that your people can deliver an awesome experience to customers.

For more information see the “Increase Your Prices” Strategy Guide.

2. Add value

Instead of discounting can you bonus in another product or service? So, instead of offering a $30 discount can you bonus in a product that has a perceived value of $30 but a hard cost of just $5? When you do that, the customer is happy because they’ve received a great deal, and it has only shaved $5 off your profits not $30.

» A carpet cleaner could offer free sanitising with every house that iscarpet-cleaned.

» A florist could offer an extra flower valued at $2 (hard cost, say $.50)free.

» A publishing company could offer $600 in eBooks as a bonus whensomeone purchases a $150 training manual. (The hard cost of theeBooks is nothing but the perceived value is very high).

» A restaurant could offer free dessert (worth $12) with a hard cost ofjust a few dollars.

» Car dealer could bonus in $1000 worth of aftermarket services/products including tinting, duco protection, car alarm and otheradd-ons that they get at wholesale price.

For more information see the “Offers” Strategy Guide.

3. Educate customers as the value of your product

As mentioned earlier, one of the reasons why people shop on price is that price is the only thing they have that will enable them to compare products and services. That’s because nobody has told them the benefits that your product delivers – how it will change their lives. Educate your customers on the value that your product delivers and the minute you do that, price is much less of an issue.

Here’s an example:

A woman walked into an upmarket art gallery. The sales assistant greeted her warmly as she walked in. She wandered around admiring the paintings. After awhile she stopped at one painting. The sales assistant walked up to her with a big smile and said “Beautiful isn’t it!”

“Yes it is. How much is it!”

“Actually, last week a painting in a very similar style painted by one of the artist’s lesser known students, sold at auction in New York for $25,000 and this beautiful work is only $18,000 which represents outstanding value in comparison.”




See how the focus was taken off the price and on to the value for money.

And another example:

A student who enrolled in a UK-based specialist college found that 70% of students were of Middle-Eastern descent. The student asked the principal the reason for that. The principal told him that he was approached by the navy of a Middle Eastern nation to train their officers. The principal knew a little about Middle Eastern culture and knew about their perception of value. With that, he doubled their enrolment fees and secured all students. In Middle Eastern culture they perceived that to achieve the best value for money (and indeed the highest level of training) would mean paying a high price, so they paid it.

For more information and ideas see the “Educate Your Customers” Strategy Guide.

4. Risk-Reversal measures

People purchase a product because they want it to solve a specific need that they have. They recognise that when they purchase they run the risk of the product not performing to their expectations. If you can offer a money back guarantee that guarantees the customer a certain result, price becomes much less of an issue.

For more information see the “Guarantees” Strategy Guide.

Which is more valuable?

If you still feel that discounting is something you want to continue with, here’s something to consider.

Research shows that different ways of communicating a discount have a different impact on your prospective customer.

Consider the following offers:

» Buy One Get One Free

» Two for the Price of One

» Half Price

» 50% Off

Notice that with the first two that the price has been discounted by 50% but people need to buy two products to achieve the discount. The beauty of that is that you increase your sales volume and therefore increase your profits.

As you can see, the last two are pure discounts.

Research shows that a “Buy One Get One Free” offer is perceived to be of more value to customers than “Two for the Price of One”. The reason for that is people love receiving something free more than they like receiving a discount.

Then – “Two for the Price of One” is perceived to be more valuable than “Half Price”, which is perceived to be of more value than “50% off”.

With the 50% off discount, although it’s obviously a lucrative discount amount, people often have trouble relating to percentages in tangible terms but they can readily picture the value of “half”. Not only that, people are becoming anaesthetised to sales discounts so subconsciously they are no longer extremely excited about discounts.

So – next time you consider having a promotion consider one of the “Buy X get Y FREE” offer where “Y” is something that has a high perceived value but a low hard cost e.g. something that you can purchase for a very low amount yet has a high Recommended Retail Price.

For more ideas on alternatives to discounting see the “Bonus Offers” Strategy Guide.



A word of warning on discount promotions

Don’t get addicted to running discount promotions all the time. If you do, you are training your customers to NOT buy from you until you have your next discount promotion.

The exception: when reducing your profits is a great idea

This guide focuses on discounting as an ongoing pricing strategy, which isn’t healthy for your bottom line.

There are situations when discounting (or preferably, value-adding) is a fantastic thing to do for your business. In the “Lifetime Value” Strategy Guide you’ll discover how much a client is actually worth to your business over a period of years, and when you understand that, it makes sense to attract as many customers as possible, even if you just break even on the initial transaction.

The reason for that? That each customer is worth a significant amount of money to your business through subsequent purchases they make through you. It makes sense then to do what it takes to attract as many new customers as possible so you can reap the profits from the repeat (back end) sales. Make sense?

This only applies to businesses that enjoy repeat sales. Obviously, if all the profit is in your back end, and you don’t have one, discounting or making a big offer on the initial purchase isn’t going to be a profitable strategy.

If yours is a business that doesn’t attract repeat sales, make sure you make some changes in your business so you do attract repeat sales. (See “Back End Marketing” Strategy Guide).

D. Summary of key points» Discounting eats directly into your profits

» Add value by bonusing in soft dollar items instead of offering a discount

» Educate customers about the value that your product or service delivers

» Improve your customer service and people are less price-focused.

» Stop promoting price prominently in your advertising.



E. Your action planWhat Why Who WhenReview your prices and pricing policy

Increase profits. You, your team and your BSI Coach

Review discounting and stop discounting.

Increase profits You, your team and your BSI Coach

If you are in a price-sensitive market consider ways you can bonus in other softdollar items instead of discounting

Increases profits. You and your BSI Coach

Discuss ways to improve your customer service so you create a “wow” experience. See “Wow Service” Strategy Guide.

Differentiates your business, takes the focus off price and increases word of mouth

You and your team.

Discuss opportunities to offer a money back guarantee

Increase your conversion rates, lower price sensitivity and increase profits

You and your team

Review sales scripts and processes so your people are educating customers on the value that you deliver.

Reduces price shopping, increases conversions and increases profits

You and your team

Ask your BSI Coach for assistance in this area

Help ensure you’re doing everything possible to remove perceived indifference

You and your BSI Coach

the dangers of discounting and how to avoid it€¦ · » find out exactly how much discounting...

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