It’s Only a 5% Discount!

Here is a worthwhile piece of advice from Sierra Management Solutions on the potentially devastating impact of discounting on your company’s bottom line:

Problem: The CFO was worried. For the past six months the company’s margins had been dropping and now they were at the point where something had to be done. Finance had researched the situation thoroughly and the finger was pointing directly at sales.

Diagnosis: Ron, the new sales manager, was brought in from outside the company to build sales volume. Aggressive and optimistic, he was determined to make a name for himself quickly. In his eagerness to increase sales, he began to approve his reps’ requests for discounts to close deals quicker. He believed shaving a few points off the selling price wouldn’t hurt anything, and they’d quickly make it up with increased volume. Pretty soon, as his reps discovered that discounts were easy to get approved, they began offering them more frequently and they became dependent on discounting as their closing tactic. Sales were increasing, but Ron wasn’t paying attention to the bigger picture.

Prescription: Ron didn’t realize that if a company’s net profit before tax is 10%, for example, a seemingly insignificant 5% reduction in selling price amounts to a 50% hit on the bottom line. Look at the numbers. If you have a sale for $10,000 and the net profit before tax is 10%, that’s $1,000. If the salesperson gives up 5% ($500) to close the deal, that’s half the company’s profit on the sale. It’s real money, not funny money. On a personal basis, it’s just like you and I giving up half the money we put into our retirement plan.

Discounting seems so innocent; just a few pennies on the dollar, but it can be disastrous. What seems like a minor concession to a customer in order to close a deal often has serious consequences for a company. If the company is publicly traded the analysts will downgrade their opinions of the company and the stock will decline, hurting shareholders and employees alike.

Instead of discounting, learn to create value for your client so they don’t feel like they have to ask for discounts. After all, your willingness to give a discount may send a message that you don’t think the value is there. But if you must discount, get something of equal or greater value in return; perhaps a larger order, an accelerated payment
schedule or some other concession.

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