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Why You should Never, Never, discount your prices - Unless You Know The Following!

Guest post by: Peter O'Donoghue

Article Overview: Do you really understand the impact a small change in price can have to your profitability? Once you have read this article you will think long and hard about dropping prices again!

Why You should Never, Never, discount your prices - Unless You Know The Following!

Does this familiar?

You are out trying to make sales, trying to make as much profit as possible and trying to find the time to fit everything you have to do in a week into 5 days. There is always increased pressure to get new prospective clients into the top of your sales funnel and to increase sales.

With this constant pressure it is understandable that many businesses and sales people resort to chasing turnover and may not consider the impact of making small price concessions when negotiating with prospective clients.



This is crippling to most businesses!!



One of the ways that I use to demonstrate this is a chart that shows the impact of reducing sales prices. In the chart below the top numbers represent your existing sales margin and the column on the left represents the reduction in your sales margin. The grid represents the increase in turnover that you would need to achieve to keep profitability consistent.


Margin 20% 25% 30% 35% 40% 45% 50% 55% 60%

Decrease

2% 11% 9% 7% 6% 5% 5% 4% 4% 3%
4% 25% 19% 15% 13% 11% 10% 9% 8% 7%
6% 43% 32% 25% 21% 18% 15% 14% 12% 11%
8% 67% 47% 36% 30% 25% 22% 19% 17% 15%
10% 100% 67% 50% 40% 33% 29% 25% 22% 20%
12% 150% 92% 67% 52% 43% 36% 32% 28% 25%
14% 233% 127% 88% 67% 54% 45% 39% 34% 30%
16% 400% 178% 114% 84% 67% 55% 47% 41% 36%
18% 900% 257% 150% 106% 82% 67% 56% 49% 43%
20% 400% 200% 133% 100% 80% 67% 57% 50%
25% 500% 250% 167% 125% 100% 83% 71%
30% 600% 300% 200% 150% 120% 100%



Pin this up on your wall!!



Let me just demonstrate the power of knowing these numbers based on the figures indicated above above.

Let's say you run a company supplying Office products and you are setting out your sales strategy for the up coming year. Last year had seen some changes in the marketplace with some new entrants into the marketplace and a few of the existing companies closing down.

One of your options that you are considering is to drop your prices by 10% in a bid to gain significant market share and dominate the local marketplace. Your existing sales force appears to be busy and you are not quite sure that they could take on the existing customers that you anticipated to gain.



Looking at the sales reduction chart we can see that, assuming a margin of 30%, if the company decides to reduce prices by 10% they would have to increase turnover by 50% to just maintain the existing profitability. That's some going.



I'm not saying this is not achievable and in some businesses it is a smart strategy. In most businesses, however, it never pays off.

This works in reverse too!!

If you are operating on a margin of 30% and you increase your prices by 10% you can afford to lose 25% of your turnover --- without losing any profitability.



What can you do about this in your business?



*Read my articles on service based selling -- they will provide you with the platform



*Make sure everyone in your business knows the impact of offering concessions and reduced prices. Make sure that every sales person can recite the required turnover increase necessary for every 1% reduction in sales price at your gross margin.



*Invest in negotiation training to ensure that all of your staff can maximise the value of every opportunity that they encounter.



*Analyse your existing client base and find out who your best clients are. There is a concept in sales called the 80/20 rule. In this situation it is usually true that around 80% of your profitability comes from 20% of your clients. Identify which ones these are! Once you have identified them, invest as much time as possible finding out everything about them and develop focused marketing and sales strategies to pin point and acquire more clients like these. Make it your number 1 aim to make them yours.



*Look at your business and see what opportunities exist for selling at a higher margin. This may be through specialising in a specific area or developing your own niche. This is not easy but remember that at 30% margin if you can only sell for 10% more you can afford to lose 25% of your business - just to stand still.



I am not saying this easy. As I said in my last newsletter, however, it is unlikely your competition will have made the effort to put effort into this crucial area.

This is such a powerful Sales strategy that you owe it to your suppliers, customers and business contacts to forward it to them and let them know too.......

To your sales success..............

Related Articles
  Why Discounting is Hazardous to Your Business
  Discounting Prices: How Low is Too Low?
  Raising Service Prices in a Recession
  Pricing strategies
  Real World Advice for Retailers - Loss Prevention, Chapter 3

Article Tags: price concessions, profitability, prospective clients, sales strategy, turnover



Related Forum Posts
Why women don't charge more - I just read a chapter in Pitch Like A Girl: How a Woman Can Be Herself and Still Succeed, by Ronna Lichtenberg that deals with this. THe chapter is called Pricing the Pitch. "In a WAll Street Journal article about what might be holding women back from corporate success, Terry Dal, a former vice president at Wells Fargo bank, said, "Good girls don't advertise; only prostitutes advertise. We feel dirty promoting ourselves." The author's advice: The first step in getting the money you desserve is to understand the market rate for your offering. Not what you think you need, not what they're willing to pay, but the going rate for similar goods and services offered in your area by someone with your skills and experience. Then, seek expert advice. "Men routinely consult lawyers, financial advisers, exxecutive recruiters and any other paid counselors to help them assess what constitutes a fair fee." Your research into going rates should not lead you to a single price for your pitch but rather a range of prices - both a market range and a personal range, which should overlap but won't necessarily be identical. In pricing, one size does not fit all. The final step in determining your price is to consider what you think you'd be paid for the same job if you were a man. The author also discusses why women usually discount their prices (must'n't appear too over-confident), the difference between discounting and "giving a discount", and other issues. I'd advise every woman wondering about what to charge to read at least this chapter of the book.
zipcar saves Gas cost - The gas prices haven't affected me in anyway. I use the Transit system and ZipCar. I love Zipcar 'cos it has Gas and Insurance included in the prices and they haven't raised that for a couple of years now.
Re: How do I implement blog advertising spots into my blog? - Hi topeyinka, Ken from the PPG forum, advised us once on these prices: Above fold $100 per month for banner add size 468px X 60px (in a header position, or similar) $50 per month for the cost above the fold for a banner add size 125px X 125px (this is the standard blog ad) $20 per month for a text link above the fold. Below the fold... 50% discount from the above plans. These are for a website, not a blog,. I don't know about a software, just place the text: "Advertise with us -contact..." or something like that on the blank places in your blog.
Re: What is your biggest challenge? Today? - [quote="Alan Mater":3qk869js]No, but it's a good indicator that you'll get good quality. People that provide quality know that they can raise prices due to the quality of their work.[/quote:3qk869js] It is certainly an indicator, but my personal experience after working with many many freelancers, that price is can be a weak indicator. Quite often the reason is some people are much better at marketing and selling themselves, which results in more clients, and higher prices. But their ability to market and sell themselves it not necessarily an indicator of their quality. [quote:3qk869js]Should we let the market determine how much we're worth, or should we tell the market how much we're worth and let it up to them to decide if what we're saying is true?[/quote:3qk869js] The market always decides. The price is not set until a transaction takes place, so you could put your prices where-ever you want but if nobody wants to buy it, then the market has refused that price. Its certainly true some people undervalue their work (just as some over-value), but you can only raise prices as much as people are willing to pay, and as you raise your prices you'll find fewer and fewer willing to pay (market forces). If you can charge more than average in your industry then that is great, certainly you should not lower your prices and I was in no way suggesting that. Its up to the freelancer to try and get as much as they can for the work they do, but market forces will always limit that.
Re: What is your biggest challenge? Today? - [quote="christew":1f5i0uox][quote="Alan Mater":1f5i0uox]The question of quality comes into play at this point. [/quote:1f5i0uox] Yeah quality is often correlated with price, but paying more won't always guarantee higher quality. If you look around there is a huge amount of great writing talent that work at good prices. I was once one of those writers (started at $3/post) before I eventually ended up doing my own thing. The internet has empowered almost anyone to become a writer very easily, which has opened up the job market, pushing down prices considerably.[/quote:1f5i0uox] No, but it's a good indicator that you'll get good quality. People that provide quality know that they can raise prices due to the quality of their work. But, as you said, because of the competition these days, the prices are low and forcing people to charge less than they normally would. It's finding the balance between the price you want to pay and the quality you want that can be a challenge. You may have to go through several different freelancers before you find one that will be your long-term provider. I have a client I write articles for at very minimum prices. I don't mind it, though, because it's not my main service, and I know I'm helping the client out with getting more work. He has to charge lower prices because of the competition, so in turn I get paid less. This brings up the question: Should freelancers lower their prices just to please the market and risk losing money in the long-run? A problem I see is that people under-value their work too much and to the point where it's really not worth doing anymore. I would much rather keep my prices a bit higher and continue to provide outstanding service, rather than depreciate and devalue myself. Should we let the market determine how much we're worth, or should we tell the market how much we're worth and let it up to them to decide if what we're saying is true?


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