The Perils of Discounting

The Whetstone Group has a great newsletter where they dispense advice in a fun problem/analysis/prescription format. It makes things clear and easy to understand. Their advice in this article is especially clear - think twice before discounting! It can have unforseen results.

Problem: The CFO was worried. For the past six months the company's margins had been dropping and now they were at the point where something had to be done. Finance had researched the situation thoroughly and the finger was pointing directly at sales.

Analysis: Ron, the new sales manager, was brought in from outside the company to build sales volume. Aggressive and optimistic, he was determined to make a name for himself quickly. In his eagerness to increase sales, he began to approve his reps' requests for discounts to close deals quicker. He believed shaving a few points off the selling price wouldn't hurt anything, and they'd quickly make it up with increased volume. Pretty soon, as his reps discovered that discounts were easy to get approved, they began offering them more frequently and they became dependent on discounting as their default closing tactic. Sales were increasing, but Ron wasn't paying attention to the bigger picture.

Prescription: Ron didn't realize that if a company's net profit before tax is 10%, for example, a seemingly insignificant 5% reduction in selling price amounts to a 50% hit on the bottom line. Look at the numbers. If you have a sale for $10,000 and the net profit before tax is 10%, that's $1,000. If the salesperson gives up 5% ($500) to close the deal, that's half the company's profit on the sale. It's real money, not funny money. On a personal basis, it's just like you and I giving up half the money we put into our retirement plan.

Discounting seems so innocent; just a few pennies on the dollar, but it can be disastrous. What seems like a minor concession to a customer in order to close a deal often has serious consequences for a company. If the company is publicly traded the analysts will downgrade their opinions of the company and the stock will decline, hurting shareholders and employees alike.

Instead of discounting, learn to create value for your client so they don't feel like they have to ask for discounts. After all, your willingness to give a discount may send a message that you don't think the value is there. But if you must discount, get something of equal or greater value in return; perhaps a larger order, an accelerated payment schedule or some other concession.

Whetstone Group is a sales process improvement company that focuses on helping companies implement a proven sales process that will increase sales, shorten the selling cycle, increase closing rates, and improve margins. Learn more at www.whetstonegroup.com

A Handy Comeback to Requests for a Discount

Here's a helpful tip from sales trainer Kelley Robertson that will help you when a prospect asks for a discount.

One of Robertson's training clients sent him the following email:

"I sent my prospect a proposal and his first request was that I drop my price. However, I remembered your advice of asking for time to think about his request and told him that I would get back to him the next day. When I was discussing his request with my business partner a few hours later, my prospect sent me an email and suggested that she was open to a concession and I was able to close the deal without resorting to giving her the discount I had initially intended."

One of the most effective strategies you can use when negotiating a deal is to say, "Let me think about that and I'll get back to you."

"Unfortunately, most salespeople hesitate to use this technique because they're afraid they will lose the sale," says Robertson. "However, I consistently found that taking time to think about the other person's request causes them to make a counter-offer. That's because a highly-qualified prospect wants to do business with you and is willing to make a concession. Asking for time to think about the offer places pressure on their decision-making process and can give you the upper hand."

So, before you accept your prospect's demand, tell them that you will think about it and get back to them.

As President of The Robertson Training Group, Kelley has helped thousands of professionals improve their business results with his engaging approach to sales training and speaking. Learn more at www.robertsontraininggroup.com