Discounting is Bad for Business Value. Especially When Protecting Against Inflation. Some ideas to avoid it.

Reflections

'Remember to switch off Linked Notifications' so as not to confuse, dang, it caught me good.

LI Connection 1: Congrats on the new role,

LI Connection 2 : Well done.

LI Connection N: Wonderful news

Me: What the heck!!! ... Ooops.

I am still your Archer NPG Partnership , with Archer Sales Consulting, powered by Sales Xceleration? .

But, Lemonade and silver linings, press is press.

I was extremely fortunate to meet, through my many network meetings last year (think >300) some absolutely fabulous people. The functional expertise and business model variety was simply mind blowing, it broke down my corporate mindset to its foundation.

As a side bar, if you're looking for functional experts, but you don't want to go W2, I may just know a few people who can help you. Successful corporate executive resumes, who are now fractional / outsourced hands-on functional executives, ready to start adding value to your business, in days. Most are ex Fortune 500, FTSE 100.

The Fractional Connections group is the brainchild of Nancy Fox - Productizer, AI Innovation . Nancy has attracted a premier community of fractional and outsourced executives, dedicated to helping SMB owners and growing entrepreneurs accelerate their success. I'm happy to share more and if you wish to join the network, let me, or Nancy, know.

Now, onto why Discounting is bad for your business value.

Grab your drink of choice and a comfortable chair (stolen from a very entertaining President, who would start with this comment in his written monthly corporate report).

10-minute read, and there's some math.

While discounting is tempting in such challenging times, when business and sales professionals accept a lower price, it opens a veritable Pandora’s Box of likely problems that will put the business at risk. Here’s how discounting hurts your business, along with some alternatives that can keep you from sacrificing profit with the context of inflation adding complexity:

Effects of Inflation

First, what is inflation? Inflation is a rise in prices, which can be translated as the decline of purchasing power over time. Investopedia’s article, Inflation: What it is and how it can be controlled, is a great resource on economic inflation.

Second, how does inflation impact a business? And how crippling can a recession be for profits, margins, and outright survival?

In stable economic times, inflation is part of the normal cost of business and is less threatening to business success and survival. However,

• Businesses now need to balance their supply with consumer demand
• They need to plan for growing expenses, including higher employee pay
• High supply chain costs could narrow profit margins further

For SMBs, the bottom-line impact of this economic volatility can be much more severe than for larger companies. So, what can the typical SMB do to be prepared and protected against inflation and recession? Our past article, Inflation: How to Prepare and Protect Your Business, provides key strategies to weather economic downturns and challenges.

But one thing most businesses should NOT do, without careful consideration, is discount pricing on products and services.

Discounting is Bad for Business Value

It demonstrates a lack of confidence in your customer value proposition and erodes trust in YOU.

This goes back to the core of your value from the customer perspective.

Even if the customer doesn’t automatically value your solution as you would like, when you start to discount, it shows that you don’t really believe your value proposition either. Prospects sense this lack of confidence and question two things:

1) Is this solution as good as I thought if they are willing to accept less? and

2) Can I really trust this person who wants me to buy it?

Yes, buyers are tough, but rarely do they have the sole decision in the B2B realm, there's a consensus. Buyers are there to weed the chaff for their organization, so, good buyers are your friends and will champion excellent value propositions. However, they will always ask for a discount. How your sales teams handle the situation, well, this is where the difference starts.

It lessens the perceived (and therefore, actual) value of your product or service.

Simply put, if the customer asks for and receives a discount – regardless of the reason – the perceived value* of your solution automatically goes down. So, if the price is lower than your claimed value, the actual value can really only match the price paid. And this new belief system can put you in a bad position for future business.

* Peter Drucker 1973, 'What the customer thinks he or she is buying, what he or she considers value is?decisive'.

It creates an expectation of future discounting.

Because your earlier discounts have lowered the bar on the perception of value, why should they pay more? Would you? Discounting sets a bad precedent that undermines your future opportunities to maximize margin.

It squeezes your profit margin unnecessarily.

AND THIS IS THE BIG ONE for business survival.

You know, if you sell a product or service at full price, your margin will be higher than if you sell at a discount, 101. Conversely, the profit margin you lose through discounting must be made up for in future opportunities, causing you to exert more organizational effort, close more deals at a higher price or sell more volume to compensate (w/o working on cost yet).

A quick test question, ask your sales team,

• If they can explain this to you?
• More importantly, show you the money impact?
• And what do they need to do to replace the loss?

It's why our finance team members get upset with salespeople 'they give discounts away like confetti', one memorable quote and it may have had an expletive the first time round.

More importantly, have we set the sales team up for success?

Outset: Unit is Priced at $100, your loaded cost $60. GM 40%.

Order qty 100. Order Value $10,000. $6,000 Cost, $4,000 in margin dollars.

How does your team really discount because I dare say it's not 1%, and, let's hope it's not in whole or easy round ups, i.e. 5 and 10%'s...

So, you get asked to discount, let's start at 5.753% Discount.

Look to use odd numbers, go to 3 decimal places, as it actually looks like you had to really sharpen the pencil and argue with your 'manager' to get them the discount, and it tentatively shuts the door for them to ask for more.

Discounted 5.753%, New price $94.25, Cost $60. GM% 36.4%. Now, it's getting 'baddish'.

Order qty 100. Order Value $9,425. $6,000 Cost. Loss of $575 to the bottom line, now it's a 14.3% margin dollar drop ($575/$4,000). Yikes...

How do you get the $575 back? well, it's shocking to see, if each unit is now making you $34.25: $575 / $34.25 = 16.8 units, so you need to sell another 17 units to get back to your original 40% margin on $10,000. That's a 17% increase in qty / activity, caused by 1 order... and that's the doom loop. If this had been an order for 1,000, 10,000, this is lost capacity on the production side. This time and 'effort' is lost for future order capacity! That capacity, I suspect, is already planned to hit this months number. Unintended consequence 1.

You can also increase your prices on the future order of 100 units, in this case the price would have to be $105.75/ea. But putting in a negative discount typically does not work, so it often requires a hard change of List Prices in the ERP / Financial system, which can, and probably will, get flagged as a nonconformance or variance at month end ... this ball keeps rolling.

A 10% drop in price has a $1,090.00 / 25.4% impact on your margin dollars but requires your organization to find 38% unplanned capacity from the organization, in this example.

Dangers of variable compensation driving unintended behaviors

Another gotcha, and why compensation plan intent is really, really, important.

Is your current plan driving the correct behavior for your business?

Let's talk commission, (I'm not saying this is bad by the way! except...)

The Salesperson gets 5% of all sales.

Outset $100/ea, list, 100 qty, Order = $10,000 drives a $500 payout.

Unintended consequences 2, a $28.76 loss in commission payout for a $575 margin loss to the company. Salespeople will work the plan you give them, so telling them later we can't afford to pay does more than drives disgruntled salespeople......

Salespeople are way smarter, give them a market beating value proposition, ask them how to help you grow profitably so they can grow their variable income. The customer gets perceived value for a price they are happy to pay, you have a highly motivated sales team that is less likely to leave, you have a profitable legacy you can share, e.g. pay profit bonus to your non sales team members, and a happier home life. How many wins is that? and yes, it's not easy, even harder if you're doing this alone.

Else....

It forces you to cut corners (or at least consider cutting them).

To maintain the necessary margins after selling at a discount, it will inevitably prove tempting to find ways to lower your costs – either by reducing material costs or the activities associated with servicing the account. While it is always a clever idea to find ways to operate efficiently, if you feel forced to unnaturally lower your costs, you could easily cross a critical quality line where your perceived value takes yet another hit.

Value, in the view of the paying customer, is hard won and harder to win back.

Better Alternatives than Discounting During Small Business Inflation

Are there better responses to inflation and recession for the SMB? Certainly, while customers want to control costs as businesses need to raise prices to battle inflation, overcoming this economic “double whammy” can be challenging. But it CAN be done. Here’s how your business can possibly fend off these negative economic influences:

Emphasize value

The best alternative to discounting is to be crystal clear and confident in presenting your value proposition, both emotional and cost benefit wise. Ultimately, it should be irrefutable that the prospect will receive an equitable return on investment. While reaching that awareness, it is reasonable for the prospect to ask questions, offer objections, and seek the best deal. This is all part of their due diligence as they represent their interests. But if you can overcome objections clearly and without hesitation, the value of your solution will become appreciated, and the quoted price will be supportable.

Remember, you have two choices when attempting to equalize price and value – so choose raising value over lowering price. Your customer will “get what they paid for” and you just made more money and avoided long-term issues!

Eliminate components to stay within budget

If budgetary restrictions just can’t allow the prospect to agree to your price, look for ways to reduce or eliminate components from your solution. For instance, your standard solution might include service elements the prospect is not likely to need. If you can make cuts without risking the customer’s satisfaction with your solution, these cuts can make the deal possible while allowing you to stay true to your standard pricing. Just make sure the customer is on board with the modified solution upfront.

Walk away

We’ve said many times that “no” is an acceptable answer. It empowers you (and your prospect) to find a better fit somewhere else. It’s better to walk away than to become restricted by a bad professional relationship.

Especially during tight economic times, it’s reasonable for customers to expect the best deal possible, but discounting creates a variety of problems for the solution provider. Ultimately, these problems can affect profit margin, customer satisfaction, and your reputation so severely they may threaten your business. As customers can stop using your company's products and services, you too can stop accepting their orders. Let them harass your Competiton.

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