Why You should Never, Never, discount your prices - Unless You Know The Following!
Why You should Never, Never, discount your prices - Unless You Know The Following!
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..............
Why You should Never Never discount your prices Unless You Know The Following - To learn more about this author, visit Peter O'Donoghue's Website.
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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..............
Why You should Never Never discount your prices Unless You Know The Following - To learn more about this author, visit Peter O'Donoghue's Website.
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