We’re confident in saying most businesses have offered a discount from a place of fear.
It’s the default response when we’re trying to win new business.
To make a proposal more attractive, and a last-ditch tactic to close the deal.
Discounts have become a way of life in the Australian marketplace.
Promotions arrive in your inbox offering discounts for every occasion – it would seem that every item has it’s own day of celebration, and a perfectly paired discount – but in reality, it’s about as appealing as a box of Coolabah, and a cold Chiko roll from down the road.
We can get so obsessed with discounting that it becomes standard practice in our business.
It’s easy to knock-off 10%, 15% or even 20% off the sales price.
When navigating through the ups and downs of business, it can be tempting to reduce prices to get sales across the line, but as we’re going to discuss in this article, it’s important to think about the long term effects of discounting, and what factors to consider in making a decision.
Discounting in business can be dangerous, because it is so common, business owners get trapped into thinking that it is a legitimate and profitable strategy.
Rarely do they step back and truly understand the costs of this run-of-the-mill approach to “winning” new business.
In reality, experience shows that most customers are attracted to a business through discounting, rarely, if ever, come back again.
Value-minded consumers have long-term memories and it is hard to retain market-share when the economy recovers and you try to raise your prices or eliminate promotions.
Consumers give you their hard-earned money in return for something that meets or exceeds their perceived value.
Money represents perceived value.
This should represent what it’s worth to the customer to have their problems solved, but it also needs to have healthy profit margins worked in there for the sustainability, and scalability of your business.
We are in it for the long haul, and we want you to think about this too
When discounts are offered for no other reason than to boost sales it can deteriorate the standing that you hold with your customers, and ultimately bleeds all the way through your financials.
Let’s talk about that.
TIMES TO CONSIDER DISCOUNTING
Before we go in on the negatives of discounting, we do want to provide opinions on both sides.
Discounting and sales promotions can be a powerful technique when done correctly, and strategically – not from a place of fear, or desperation.
This is how it could help your business.
1. Increases Incentive to Buy Now, and Pay Upfront
If done correctly, they can increase sales volume, and reduce time involved in the sales cycle to get cash in the bank sooner.
However, the level of the discount needs to account for the revenue required to continue to trade profitably. Don’t overextend yourself purely for revenue, profit seriously needs to be taken into consideration.
Remember, “Revenue is vanity – Profit is sanity – Cash is reality”
– Greg Savage
2. Build a New Business Line
Expose your customers to new offerings, for example, if you’re adapting to an online model given the changes in our daily lives at the moment – you can encourage your customers to experience the new model, with a price incentive.
However, it’s important to understand the costs of delivering this new model, and to do so sustainably. Educate your customers that this is a promotional period and explain what future rates will look like after this period.
3. Dispose of Older Inventory
Product-based businesses may find themselves with excess inventory – if they’re unnecessarily occupying space, then move it on.
4. Keep Valuable Employees Busy.
If you are carrying wages, but employees are unable to work, or have their hours reduced, they will be less motivated while they are at work.
If team members are left in the dark, and not provided with opportunities, they will begin to look elsewhere, when that time comes – keep them engaged.
NEGATIVES ASSOCIATED WITH DISCOUNTING
Now, to the negatives (and these are important)
The biggest risk is that it can eat into your operating profits, hurt cash flow, and create a negative long-term perception of a product and ultimately sh*t runs down-hill – leading to a poorer market position, and ultimately, a worse cash position – nobody wants to be at the bottom of that hill
1. It Masks Deeper Business Issues
With the ever-increasing competition, it’s even more important that you hold onto as much profit as you can.
You can’t discount yourself out of poor cash flow management.
As a business, if you discount by 50%, what does that do to your sales? It means that in order to hit your same revenue goal, you’re going to have to sell twice as much. Do you have the time or the manpower to do that?
If you throw something on sale every time you can’t cover a major bill, you have a deeper problem.
Work with your accountant (that’s us) to get a better grasp on cash flow management, or identify areas where you could trim business costs. We’ve got our own Business Continuity Plan in place, and we can help you structure one too.
Lets put this into perspective, if your present net margin is 30% (average), and you give a 10% discount, you need to increase your turnover by 50% to make the same amount of profit.
Now, from the customers point of view, 10% isn’t enough of a discount to get them off the couch, 20% off is good, 50% is pretty attractive, and hey if you can increase your turnover by at least 200% then go for it!
Otherwise, you risk getting into a discounting cycle to stay afloat.
Don’t ‘kick the can’ down the curb and forget the problem and just ‘hope’ that it gets better. Work with us to put a strategy in place.
2) It sets a bad precedent and customers become accustomed to them.
Once the bar is set, it’s often challenging to reset the customer’s expectations to what the price should be. Your customers have anchored themselves to the discounted price – and anything above that is perceived as expensive in their eyes.
When you offer a discount, whether it’s the first engagement or the fifth engagement, there’s no going back.
As soon as you lower your price, your customer will expect to see the same thing next time – they will continue to leverage that discount with you, which is only going to hurt you long term.
Don’t make short-sighted decisions based on emotion – run the numbers, and work from fact. That’s what we do, and we’re here to help you do the same.
3) Lower Perceived Value Can Create a Perception of Quality Issue
As soon as you offer a discount, your prospect immediately loses confidence in you, so when you’ve lost that, you’ve most likely lost the client.
As mentioned, continually discounting can lead to reputational damage.
Customers may wonder why you can’t keep busy at your standard rates, or if your business is suffering, they could worry that you’re selling subpar products.
You could also bring in so much discounted business that, while your sales jump, your service and quality slips and you lose long-term clients.
Think carefully about how much of your business rests upon your reputation and the potential impact discounting could have upon it delivering what you promised to do.
STRENGTHEN YOUR BUSINESS INSTEAD
Now we can see how discounting can negatively impact our business and cause more pain than it may be worth.
The stronger your business is, the less likely it is to be affected by risks, or unforeseen events (like right now)
Strengthening your business starts with financial management, and includes strategies to retain and broaden your customer base, create opportunities, and improve business practices, but to do these effectively, you need to understand the financials associated with them so you can make the right decisions.
WHY CHOOSE LEVEL UP?
We are a 7-foot team of expert, Brisbane accountants that are armed and ready to level up your business.
The average accounting firm is a dime a dozen, we’re here to clear out the smoky offices and dusty dinosaurs and develop fresh, tailored accounting solutions for your business, no matter the industry.
When you work with Level Up, it’s not all about appearances. It’s not about the spick and span of the talk, it’s about the action.
We’re active, constantly vigilant, searching and testing ways your business can save on tax. We illustrate a map of where your business can go, and how you can rule the game.
That’s what it means to have the Level Up team behind you.
Business Advisory
We know your business is unique and no one knows it like you do.
Therefore, we’re not here to run your company, we’re here to offer tailored advice that takes your business to the next level.
But what does ‘business advisory’ really mean?
Well, we can’t speak for your average firm, but at Level Up, it means we have your back.
We protect your assets, structure your cash flow, hack your tax and we develop expert, custom-made solutions for your business. We listen to what you want by taking the time and care to learn your business inside out.
Our team of expert business developers can level up your business by tackling every corner of your organisations needs:
- Cost-benefit analysis
- Budgeting and cash flow reports
- Financial reporting
- Trust account reconciliation
- Outsourcing of finance team function
- Monthly management reporting
- Financial and non-financial reporting for banking covenants
- Finance applications
- Asset protection structuring advice
- Review for business purchases
Whatever your business, you can bet the Level Up team is ready to invest the time to create a perfect-fit solution.
We Build The Map
We’re all about the longevity of your business. We shoot for the stars, and we’re ready to cement your business in the foothold of the market for years to come.
If you’re looking for direction, we map out the course and leverage your business structure to achieve optimum tax benefits and gear your company towards the future. We’re in it for the long haul.
We know what to avoid and what’s a trap (like discounting, without a specific strategy).
It’s time your business didn’t just survive, but thrived.
Contact us today on (07) 3265 6740 or hit the contact form below.