Sales & Marketing
Why it's almost always a bad idea for British SMEs to offer discounts
7 min read
07 May 2015
Businesses want to increase their profits where possible, and will often look to offer discounts to attract customers. However, reducing costs is almost always a bad idea.
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.
So how do you increase prices? Add value.
You cannot just increase prices whenever you like just to increase your profits. You have to assess what the value is of the product you are offering and whether your price truly reflects that value. So your pricing strategies should, counter intuitively, not focus on the price of your product, but the value.
One way of adding value is, as I mentioned above, by assessing your expertise. As a long-standing business, you provide assurance to customers that your product is worthy – so you can add a premium for that assurance.
Another way is to identify your competitors and figure out how and why you are better. If you are not, then make yourself better so you can increase your prices.
If you really feel your pricing strategy requires you to reduce prices…
You can still add value in some way without discounting, while still providing a lower fee to your customers. You can do this by giving offers instead of discounts.
A really great example of this is what supermarkets here in the UK do, where they offer you vouchers for “£5 off your next £30 spend” or something to that effect. You can also do “buy 2 get 1 at half price” kind of deals to add value without actually discounting your products.
Go through the analysis similar to what I have done above with your company and you will realise the effect to your gross profit is not nearly as massive as giving a straight discount.
If you feel, for your business, that you absolutely MUST offer a discount then make that discount work for you; relate the discount to an early-bird payment or shorter credit terms such as, “ten per cent off if you pay up front.”
Many companies choose to do this because they have issues with cash flow – so they weigh up the effect on the gross profit against the benefit of increased cash flow and that makes more sense to them.
The most important thing is to be really aware of what are the actual effects on your business from the offers you are making. Whenever you can, say no to discounting when trying to increase your sales, and instead think of smart pricing strategies to provide value without slashing your profits.
Shweta Jhajharia, principal coach and founder of The London Coaching Group, is a multi- award-winning business coach, recognised both by external bodies and the industry awards panels as the top coach in the UK. Despite competitive economy, her clients across sectors consistently achieve measurable double digit growth (over 41 per cent) and are the most awarded client base in UK.