I am often working with clients who need to boost their sales and far too often they say something like, “We should look at pricing strategies, right? Why don’t we just do a ten per cent discount as an ‘end of season’ sale so we can boost our sales?”
As a business coach, I usually guide my clients to the right answers. However, when they suggest offering a discount I have to step in and freeze the thought immediately. It’s almost always a bad idea to offer a discount.
The thought, “If I am the cheapest, then people will buy from me,” is actually totally flawed thinking. There is a difference between price and value and the truth is, people are looking to buy value, not spend the least that they can spend.
Not only should you be focusing on value rather than price, but discounting your product also has a much larger impact on your business than you may think.
Let’s imagine that your customer is paying £100 for your product or service and your direct costs are £80, giving a gross profit of £20.
If you offer a ten per cent discount you receive £90 from the customer but your costs are still £80, so your profit is only £10 – that’s a 50 per cent decrease in profit!
When business owners come to me for business coaching, they are usually trying to take their business to the next level; to reach for higher and greater plains. And yet, the only time they have ever increased their prices is because of an increase in costs.
This is a huge missed opportunity. If you’ve been in business for some years, your brand has gained value. Your product, no matter what it is, has gained value simply by survival. You have proven that there is a market for your product and that in itself makes it more valuable.
When the value of your product has changed, you can then start to reconsider your pricing strategies.
Now let us take a look at what increasing the price of your product could do for you:
Your customer pays £100 and your direct costs are £80.
You decide to increase your prices by ten per cent. Now you are charging £110, while your direct costs are still £80. Your gross profit is £30 – an increase of 50 per cent.
When you increase your prices, even by an incremental amount, the effect on your profits can be just as dramatic as the damage that comes from discounting your products.
Continue onto the next page to find out how you can successfully increase prices, and discover the best method to take if you are determined to offer discounts.
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