Rethinking how your company provides customer discounts can have positive financial impact
Ask yourself this question related to your customer pricing – “when is the last time we reviewed the effectiveness of our pricing and specifically as it pertains to pricing discounts we offer?”
The fastest path to growing your profit margin is through price increases. Now most people would say that raising prices is very difficult and quickly move on from further thought on the topic because it is so hard. But rather than thinking about raising prices, give thought to reducing the degree of discounts.
For many businesses, the typical scenario is we provide our customers a price for our product or service and often times they come back asking us for “more”, or a discount. In return, very often our sales team is programmed to reply with a discount offer of 5% or 10% and hope this pushes the customer to purchase from us. But why is it that we think in terms of 5% or 10% type increments, why not 2%, 2.5% or 3% or 7%? Many times, the customer is asking for better pricing simply because there is no downside to doing so and when you reply with 5% or 10% they then act because you check a box for them. But will they say no if you offer an additional 2.5% discount versus the 5% or will they accept this to check a box, tell their boss that they didn’t accept your initial offer and got a better price from you. But instead of you giving away 5% profit, you gave away half of what you traditionally would do. They win by getting the better price they needed and you win by keeping more of the margin in your pocket.
At time of a future sale of your company, the acquirer will want to understand your price strategy and how it impacts the gross margin of your products and services. They will look to see if your gross margins have increased or decreased over the past few years and when they see you increasing your margins, this builds company value in their mind and may get them to pay a higher price for your company. Periodically revisit your pricing strategy and specifically your discounting strategy. As a boss early in my career told me at Black & Decker, “don’t be predictable with your pricing as over the long term it will make it easier for to competitors to compete against you”.
