Friday, July 19, 2013

Why Discounting Your Price is the Wrong Strategy

One of the common responses to a tough selling environment is to let anyone on the sales force can offer a discount.

When you discount your price it's usually because  you are either under time pressure or you have not done a good enough job laying out the price/value relationship.  

Let’s look at both of these issues.

Discounting Price Because of Time Pressure

First there is the issue of discounting due to the time pressure of such circumstances as needing to make a quarterly number or liquidate inventory.  In these and similar situations, you’re not only signaling your methods to immediate customers, but you’re also signaling future customers.
Look at the automotive industry and how people buy cars.  The auto industry has conditioned the marketplace to buy a new vehicle at the end of the month when they’re all chasing their monthly numbers.
Does this result in more cars being sold? No. The only thing it does is accelerate a purchase, but it does so at a discount.  Ouch!  Lost profit.   If you add up the total sum of month-end discounts being given, there is no way it equals the extra mythical profit of a few accelerated sales.  Keep in mind too that those sales likely would have come in the following month or two anyway.
The example I use is autos, but look at your own industry. What signals are you and other salespeople sending?  What games are being played?  And for what reason do you believe incremental profit is being generated?  If you run the numbers, I think you would discover you are not gaining anything by consistently discounting to close sales.

Offer Value, Not Discounts

The bigger argument about price discounting is also the most simple.  Discounts are given because the selling process lacks the focus it needs to create real value for the customer.   Salespeople are the first to yell how they are losing sales because the price is too high.  This argument is so lame that it borders on ridiculous.
Salespeople are yelling this because they don’t want to admit their own selling process is ineffective.  Rather than saying it’s their fault, it’s easier for them to blame something else. The scapegoat is usually the price.
Yes, setting the right price point is a delicate process, but all this work gets wiped out by a panic attack of trying to close a sale.
A salesperson should not attempt to close a sale until understanding at least three of the customer’s needs or desired benefits. Remember, a customer will pay an amount equal to the level of need they have.   Put another way, consider this: If there is no need, then why should they even buy, let alone at full-price?
Many salespeople are diligent in making sure they are selling to someone empowered to actually buy.  Identifying a decision maker, though, is only one aspect of the selling process. The salesperson must be confident in establishing a relationship between the price and the value of the product or service being sold.
When I say “value,” I’m talking about the value as determined by the customer, not the salesperson.   The problem is many times the customer doesn’t understand or know how to grasp the full magnitude of their situation. Salespeople need to uncover those needs and sell to the outcome, not to the feature.
An example I like to use is a company looking to buy tablets for some of their employees.  One company might be buying the tablets to provide people who occasionally travel with a more portable way to work away from the office.   Another company might be looking to buy tablets for salespeople to use in multi-million dollar presentations to senior level executives.
Both companies have needs, but most likely the second company is looking at a larger outcome.  If you the salesperson only knew the customer was looking to buy tablets for some employees, you might view the price as “x.”  On the other hand, if you knew the impact the use of tablets could have on the customer’s business, then you would immediately realize the value to them is much greater.

What About Price Integrity?

There are some of you reading this right now and wondering, “What about price integrity and the need to treat all customers equitably?”  Yes, that’s correct and I do believe in pricing integrity, but let’s not forget the customer in the equation.
In the end, it’s the customer’s level of confidence that is going to determine pricing integrity.  If you price at different levels by customer group, but can back it up with valid reasons and a sound selling proposition that allows the customer to achieve their desired outcome, then you have pricing integrity at whatever price being paid.
Just remember that discounting is not a strategy that is effective in the short or long term. Focus on your selling proposition and uncovering at least three needs or desired outcomes of the customer.
When you do this, you will be able to present a full-value offer and protect the profit that otherwise would be lost to discounting.