Today I want to explain why discounting is not a good marketing strategy and how a small 10-15% discount could reduce your profits by a whopping 33-50%, meaning you have to work twice as much to make the same money. Also, I discuss why there are no winners in price wars.
Should you offer discounts?
Discounting is a personal decision, and primarily it comes back to the type of business you want now and in the future.
If your business name contains the word “discount”, and discounting is part of your marketing strategy, you may find this blog and podcast a waste of time.
But, if clients are asking for discounts on a regular basis, and that’s not part of your strategy, you may need to adjust your marketing because you’re attracting the wrong type of clientele.
CHEAPLE & The Tight Arse
However, some people are simply discount chasers. Marc Mawhinney from the Natural Born Coaches podcast refers to them as CHEAPLE, which are cheap-people.
There are certain groups of people who will often request a discount because they’ve been educated to do so, such as pensioners, seniors, students and healthcare card holders.
But there’s another group that everyone overlooks: “the tight arse”.
This group can afford your products and services but don’t want to pay full price, and they will try to beat you down at every opportunity, or they’ll ask if they get a discount if they buy two or more. What they fail to understand is how much discounts cost you.
You Need To Know Your Numbers
Many business owners don’t see how discounting impacts their bottom line, which is why it’s important to know your numbers.
As a generalised example, if a product or service was $60 and if you had a profit margin of 30%, your gross profit would be $18 from that transaction.
If you gave a client a small 10% discount of $6, so they only paid $54, this would be a 33% reduction to your gross profit, $18 original profit minus $6 discount, leaving you a profit of only $12.
If you gave them a 15% discount of $9, this would be a 50% reduction in your gross profit; $18 minus $9, leaving a profit of $9.
The client only sees the small 10% or 15% discount; what they don’t understand is your bottom line and that you lose a massive 33% to 50% by discounting, and in all honesty, they don’t care.
Twice The Work For The Same Pay
A 50% loss in gross profits is lunacy and equates to you having to do twice the amount of work to make the same profits as another business that does not discount, which is why I think discounting to attract new clients is a crazy marketing technique.
Of course, retail is a little different. If you’re trying to move older stock to make way for new stock, such as footwear and clothing, then it makes perfect sense to have a discount in place, such as an “end of season sale”. But don't make it the norm.
Price Wars - Stay Away From Them
If you have a new business open in your area and they are discounting their prices to attract new clients, don’t try to compete by lowering your rates.
Let them have their loss of profits, and you concentrate on attracting clients who don’t look for discounts and who would prefer a better service. Getting into a price war to attract new clients is one of the dumbest marketing strategies I’ve seen, and long term has to be detrimental to the morale of your team because they would always be working with people who have that discount mentality and who want the lowest price.
Getting into a price war with an idiot results in two idiots.
If you have a business in your area that wants to start a price war, you should relish them because they will be filling their business with the “cream of the crap”, leaving you with all the high- quality clients.
So in summary, discounting is fine as long as your business is not doing it all the time or using it as a way to attract new clients, and avoid price wars at all costs.
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