Thousands of businesses ‘accidentally’ give customers more discount than the profit they make on certain individual products or services.
To counter this is painful fact, it is important to recognize that discounting is a valid tool in the salesperson’s armory and one that must be well managed.
In a perfect world a business would be able to charge a unique price to each individual customer based on all of the factors affecting them; ie their assessment of the value of the item, their ability to pay and perhaps the urgency to them. There may be 100 unique factors affecting each customer’s perception of their side of the Value Scales.
If I can charge customer A a maximum of $100 for a product, but customer B is happy to pay $150 for the same item, then I want to charge them each their respective maximum.
What stops us from doing that is a variety of factors including the complexity of having different prices for different customers, and perhaps our own moral judgement of fairness. We also fear being found out by customer B and having no apparent justification for the differential.
In many businesses we get around these issues by charging the same headline price to all customers but giving varying discount levels to achieve the same thing. There is nothing wrong with this at all. This is as close as most businesses can get to the profit-maximizing approach of charging each customer a unique price.
The problem with this situation is all the points covered above. That is, there is no structure to the process, no control over individuals giving the discounts and no scoring of the amounts to understand what this costs the business each year, on each product line or for each customer.
So don’t feel you have to abandon discounting as a tool to flex price properly for your different customers. It is a valid tool but it needs very careful management, and must be designed into your overall pricing strategy.
Every Brand Needs A System For Discounting
Businesses need to get much greater control over the issue. That means better systems and procedures, tighter rules and regulations, and discipline for the frontline people who actually give this money away. It is just too easy in most businesses to give discounts, and the pain associated with the press of a computer button or the stroke of a pen on the invoice simply doesn’t equate to the actual amount of pain that should be felt from the drop in profit that follows the drop in price. If we can get the people on the frontline of a business to agree with the simple logic of the need to control discounts when they are real cash amounts it is very hard for them to ignore this logic when it is only a number on a page or computer screen.
Minimizing discounts is a critical area of pricing strategy.
You must quantify the discounts that you give away, and have good rules or systems to control them.
Changing the way you use discounts as a tool to flex price for different customers is a valid pricing strategy, providing it is properly controlled and understood by all salespeople and any others involved in the process.
Here’s seven ways brands can manage discounts:
1. Quantify the amount of discounts that you are currently giving. Get the finance team to determine the full list price value of all that you sell and compare this with the turnover that you actually achieve. Set up a system that scores this in as much detail as possible; ie certainly in total, but perhaps by salesperson, by branch, by product line, by customer, etc, if this is possible with your accounting software.
2. Set time-bound targets on how much you want this reduced by (globally or by the same subcategories as in 1) and equate this to the impact on profits of successfully achieving it; ie a drop in discounts of 5 per cent might be an increase in profits of 50 per cent.
3. Develop discount rules for your business. For example:
- Discount levels for various team members, such as counter staff are only authorized to give discounts up to 10 per cent without manager approval, managers can go to 20 percent without director’s approval, etc.
- Discounts not available where a customer account is outside of terms. That is, pay on time or pay more.
- Discounts must never be more than the profit margin being made.
- Discounts only with a minimum spend of say $100 or $1,000.
4. Once these rules have been approved by the CEO or finance team, have the pricing team design a roll-out plan so that the rules are communicated to the sales force, and in turn they communicate it to the customers.
5. Undertake discount-strategy training with all frontline people. Every one of those people must be able to explain the discount versus volume chart, and the other discounting issues covered. To demonstrate the magnitude of the discounting topic to your business, consider getting an average month’s discount in real hard cash and putting it on the table during training.
6. Make someone responsible for this cost, a Discount Controller. Get them to identify who gives the most away, what are the most common reasons for giving that discount, are some customers getting too much? Make it their job to manage the cost down. In most businesses someone newly recruited at a cost of $30k a year could easily pay for themselves by tackling the issue properly.
7. Involve your HR people and link salespeople’s performance-incentive pay to the gross margin achieved (after discounts) so they are driven to hold their nerve and limit the discounts they give.
Contributed to Branding Strategy Insider by: Peter Hill, excerpted from his book Pricing For Profit in partnership with Kogan Page publishing.
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