How Offering Discounts Can Ruin a Business

If you have ever been in a pricing strategy meeting with me, you already know how much I discourage discounts.

Here’s a great example: It usually starts with a seemingly innocent idea…

Why don’t we offer a discount to get more customers in the door?

I demonstrate my answer visually with a $20 bill.

Why don’t you just hand out $20 bills to every customer?

That’s what a discount does. It takes money from the business owner’s pocket and gives it right to the customer.

I love the response a business owner client gave to a salesperson who was asking to lower the price to get a commission sale.

How much would you like to reduce your own commission to get this sale?

Say NO to voluntary discounts

You know what the worse kind of discount is? A discount given to a customer who didn’t ask for it! Has that ever happened to you? You have agreed to purchase a product at a certain price (because the value is there) and then the salesperson knocks off a little more money to be a nice guy. That drives me crazy!

That salesperson just took $20 out of the pocket of their boss.

Shame on their boss for letting them do it.

These very costly voluntary discounts are the owner’s problem. And the owner also can solve this problem. One solution would be to change the salesperson’s pay to share the discount. If the salespeople want to give $10 out of their own pocket while they are volunteering $10 of the business owners, I think this would solve the problem.

Here is another example… Have you ever purchased groceries at a grocery store without a loyalty card for that particular store?  The concept of providing a loyalty card is for the grocery store to give the best pricing to the most price-sensitive customers while extracting a higher profit margin from those who appreciate more value (and are less price-sensitive).

When the customers without the loyalty card check out, the grocery store makes a better profit margin on these sales. This customer is also happy with their purchase. But what often happens is the clerk asks if you have a loyalty card and when you say “no”, they “borrow” one for you (from in the drawer or from the customer behind you) and take money right out of their boss’s pocket and give it to the customer who didn’t ask for it!

How much do you think that is costing that grocery store? Lots.

What if the clerks got a performance bonus for sharing the extra profits from not lending out loyalty cards?  Or what if they just got the profits they give away deducted from their paycheque?

Is this type of dysfunctional activity happening in your business?

Maybe it’s time to have a conversation with your sales team to see if they are handing out your $20 bills without your permission. If so, just ask them if they don’t mind splitting their generosity with you; say $10 from their paycheque along with $10 from your wallet.

I just wish I could be there to hear what they say.

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Author: Paul Foster
Paul's life’s purpose is to bring more cash, freedom and happiness to independent business owners. Paul wants to learn about your toughest business challenges and frustrations so he can help you tackle them.