Struggling companies tend to throw lots of “exciting” new ideas at the wall, and pray that something sticks long enough to turn around their fortunes. Discounting prices is usually a big part of that desperate, ugly SPLAT. But what seems like the simplest fix, the easiest fix, quickest fix, can cause long-term problems for your profit margins, your customer base, and your reputation.
So before discounting your prices, weigh any potential gains in sales volume against potential damage to these four areas that can make or break your business growth:
1. Your product, your market, and your HOT.
Do your homework. Run the numbers. Get together with your c-suite and your sales manager. Check all the leading activities you’re tracking. Measure the distance between where you are right now and the Huge, Outrageous Target (HOT) you’re trying to hit that will take your business to the next level. Will discounting your prices bring you closer to that HOT? Or will you struggle to make up the lost revenue?
Effective pricing is one of the best ways to increase the profitability of your business. Get your pricing right from the get-go, because ineffective pricing – including unnecessary discounting – is also one of the easiest ways to drown yourself in red ink.
2. Your company, YOUR prices.
If your salespeople are any good, they’re focused on one thing: selling as much product as they can. To accomplish that goal, they’re going to take the path of least resistance. Ask your salespeople for input on your pricing, and I guarantee their golden piece of advice will be, “Discounting our prices by just 15% would send our total sales through the roof!”
Your sales team isn’t thinking about the company’s big picture. But you are. It’s the CEO’s responsibility to monitor revenue streams, and keep all activities focused on hitting the HOT. Discounting your prices by 15% might make life easier for your salespeople. It might also create a profitability gap that extra sales won’t be able to cover.
Here’s an example. Let’s say you’re selling a product for $1,000 that has a $600 variable cost and $1 million in fixed costs. The formula to calculate your break-even volume is Fixed Costs/(Price minus Variable Cost). In this example, your break-even volume is 2,500 units.
If you discounted your price by “just 15%,” your new break-even volume is 4,000 units. In other words, a 15% discount requires you to increase your volume by 60% in order to break even. Ask yourself, does it make sense to discount your price and risk not hitting the incremental growth?
And that’s just the break-even volume. The goal of a successful company is not to break even, or to cover what you’re selling right now, or to keep hitting those same stale sales figures quarter after quarter. The goal is to GROW. To get BIG! If discounting your prices is only going to make hitting your current sales figures easier, then what’s the point? At best, you’re slapping a band-aid over a bigger issue. A worst, you’re setting your company up for more failure, lower profitability, and a meaningful negative impact on increasing cash.
3. Your value.
Your product or service is worth whatever value your customers assign to it. You might think that an aggressive price point will be attractive to the marketplace, and put your competitors on their heels. But what if discounting your prices relegates you to the bargain bin in the minds of your customers?
Consumers associate lower prices with a cheaper product, whether they’re shopping for groceries or comparing your catalogue to what other companies are selling. Discounting might make your existing customers place a lower value on your goods or services. And any potential new customers who want the absolute best might skip right over you and shop higher on the shelf.
4. Your pitch.
You’ve done your homework, you’ve set prices that are commensurate with both the market value of your product or service, and the growth necessary to hit your HOT. But your numbers are still lagging, and your sales team reports pushback on your pricing. Is it finally time to push the panic button and consider discounting?
No! The problem is not your pricing, it’s your pitch! Specifically, your value proposition is not strong enough to grow your client base, and your business.
Refining your value proposition starts with you, the CEO. What you’re selling should be an extension of your vision for the company. When telling customers about the value your goods provide, you really want to tell a story about your company, your mission – a story customers will want to be a part of.
Once you have that story, tell it to your salespeople, over and over again. Drill it. Workshop it. Script it. Eventually, your sales team will know your company’s story so well that they’ll be able to make it their own, and pitch to each customer in ways that will appeal to their specific needs.
Do the same thing with your customer service team. Make sure they all know the story you’re pitching too. Five-star customer support after a sale is one of the most important ways your company adds value to what it’s selling. It’s also a cost-effective way to boost your company’s reputation, and attract new business.
And if you can’t get your staff to rally around your vision and put in the hard work, go out and find top performers who will.
In the end, discounting prices doesn’t just diminish what your customers pay. It diminishes YOU, your value, your vision for success. Effectively, you’re saying, “My vision for this company is not worth what I thought it was. My product is not worth as much as my competitor’s. I need to aim lower.” And in the race to the bottom, every runner is a loser.
CEOs who turn to discounting as a cure-all don’t have the courage to fight through the tough times and keep working towards their HOT. But you do. Value your vision, your company, yourself. Don’t aim lower, aim higher. The goals you hit, the profits you make, are only as big as the targets you set. So shoot for BIG! And leave the bargain bin to your competitors.
Mark Moses is the Founding Partner of CEO Coaching International and the Amazon Bestselling author of Make Big Happen. His firm coaches over 150 of the world’s top high-growth entrepreneurs and CEO’s on how to dramatically grow their revenues and profits, implement the most effective strategies, becoming better leaders, grow their people, build accountability systems, and elevate their own performance. Mark has won Ernst & Young’s Entrepreneur of the Year award and the Blue Chip Enterprise award for overcoming adversity. His last company ranked #1 Fastest-Growing Company in Los Angeles as well as #10 on the Inc. 500 of fastest growing private companies in the U.S. He has completed 12 full distance Ironman Triathlons including the Hawaii Ironman World Championship 5 times.