It is…

…the key is to knowing when and how.

Here are three situations in which offering discounts make sense, but only if you employ the strategy associated with the discount:

Opening the door
I’m sure that this has happened to all of you at one time or another.  You’ve identified a potential customer.  You’d really like their business, but they keep telling you that they’re happy with their current vendor.

Your natural inclination is to lower your price to get their business.  Is this the right approach?  Partially.  Typically what happens is that you shoot them a low price to get their business, then find yourself locked into that pricing later when they balk at a price increase.  Why do they balk?  It feels like the old bait and switch tactic to them.  How do you avoid this problem?

• Tell them that you understand that they’re happy where they are.
• Tell them that you realize that you need to give them a reason to try your offering and that you understand that they’ll be taking a risk if they decide to give you a try.
• Offer them a discount to entice them to take that risk using this language – “I realize that you need a reason to give us a try so for this order only I’m going to reduce the price to ___.  I’m so certain that you’re going to be thrilled with our offering that you’ll gladly pay the higher price in the future.” How’s that for a statement of confidence?
• Put your offer in writing emphasizing that the price is for this order only.  Do the same with your invoice.
• Once you’ve won the business charge your usual price.

Retaining competitive advantage
Intel and Hewlett-Packard were both very good at this.  For decades Intel had a knack for beating its competition to the market with faster and more reliable chips.  Hewlett-Packard did the same for in its printer division.  Both charged premium prices until their competitors were about to launch competing products.  That’s when they lowered their price.

That’s a very successful strategy.  It not only allows them to generate huge profits when they don’t have any competition; it allows them to prevent their competitors from getting a similar return on their R&D investments.  These additional profits made it easier for Intel and HP to maintain their competitive advantage.  Coupled with effective marketing campaigns like ‘Intel Inside’, Intel and HP became the industry standard – the offering most buyers wanted regardless of price.  Isn’t that where you want to be?  You can!  You already know how your offerings outperform your competitors’ offerings.

Meeting budget constraints
Sometimes the prospect really wants what you offer, but can’t quite afford it.  The natural inclination of sellers is to lower the price to make it more affordable.  Bad move – unless you’re asking the customer to give up something as well.  Here’s a classic example.  One with which I’m sure that you’ve had experience.

You go in to the showroom to buy a car.  You find the car you want and the negotiation begins.  You tell the salesperson what you’re willing to pay, they counter with a higher price.  On and on it goes until you agree on the price.  The only thing that’s changed is the price.  The car is exactly what you wanted from the start.

With that scenario in mind, how often have you walked out of the dealership wondering whether you got a good deal?  Most of us do.  Why?  The car didn’t change!  Consequently we feel that the dealer was trying to get into our knickers and we can’t help buy wonder if he did.

What approach should that salesperson use?  If, as you made your offer, the salesperson said “Unfortunately, I can’t afford to sell that car to you at that price.  I understand that we all have budgets with which to contend and that this car doesn’t fit your budget.  If you’d be willing to forego (the moon roof, alloy wheels, heated seats, etc.), I could meet your budget.”

Now the buyer is faced with a choice.  Do I want that moon roof badly enough to pay …?  Either way, you’re forcing the buyer to make conscious choices which is in both his best interests and yours.  The more you help buyers understand the choices they’re making, the greater the service you’re providing and the satisfaction your buyers will experience.

It’s counter-intuitive, but there are only a few situations in which discounting makes sense and two of the three require buyers to give up something to get the lower price.

For more information on how you can command higher prices for your products and services call Dale at 314-707-3771.

Great strategy…

…or sheer folly.

Retailers have decided to move Black Friday, the day they begin their heavy holiday season discounts, up a month. Typically Black Friday is the day after Thanksgiving.

Why would they do this? Here’s what a major retailer said “We don’t think buyers are going to be spending as much this year so we want first crack at their dollars.” Is this sound strategy or a self-inflicted wound? Let’s take a look.

Let’s assume that you’re a retail buyer (who isn’t?), it’s the holiday season and you have indeed decided to spend less this year. Your child is pining for the latest video game. You see an ad for some great discounts on clothing for your child, which do you buy – the clothing or the video game?

If you’re like most parents, unless your child’s clothing is going to subject them to some emotional trauma vis-a-vis teasing by other kids, you’re probably going to buy the video game. Even if their clothes have to be replaced, you’re likely to go to the discount chains and buy only what’s needed in hopes of still being able to get that video game.

If what I’ve outlined is anywhere near accurate, what impact would a heavy discount at Macy’s have on your buying decisions? None that I can see. My experience has been that buyers spend money on what they really want. Don’t trust me on this. Simply recall a time when you drove through a trailer park and saw a dilapidated trailer with a brand new $30,000 pickup truck in the driveway. Or an older subdivision of 900 square foot homes with a $150,000+ RV in the drive.

These folks may have scrimped on their housing, eaten store brand canned goods and shopped at WalMart for clothing, but when it came to what was really important to them – the pickup truck or RV – money was no object. They paid the price.

Let’s take this analysis a step farther. Let’s see what the retailers are really accomplishing. As we’ve already seen, the likelihood of generating additional sales is low because buyers decisions are based on their wants, not on the availability of low prices.

Second, if the retailers predictions are accurate and buyers aren’t going to be spending a freely as in previous years, then it’s going to be even more difficult to attract sufficient buyers to offset the revenues lost through discounts. In other words a 20% discount means that the retailer must now attract six buyers to generate the same revenues they would have gotten from five. Raise that discount to 50% and you’d need 10 buyers instead of five. This at a time when you don’t expect lower traffic in your stores?

Third, discounts alter the timing of sales, not the volume of sales. If I offer a discount to people who would typically buy my offering anyway, I may get them to buy earlier but I’m not going to get them to buy more. By accelerating sales into the current month I’m digging a hole in future months’ sales. If I do this often enough (Black Friday occurs every year), I train my buyers to wait for a deal before buying. Now I’ve shifted from a shovel to a backhoe. I’m digging such a deep hole that I’ll probably never get out – think Chrysler and GM.

If this were baseball, the batter (retailer) would strike out. It’s counter-intuitive, but discounts don’t attract more business. They simply keep you from generating the revenues available to you.

For more information on how you can command higher prices for your products and services call Dale at 314-707-3771.