Why Discounting Is Killing Your Business

1. WHY DISCOUNTING IS KILLING YOUR BUSINESS An eBook by

2. Don’t wage a price war: why discounting is killing your business WHY MANUFACTURERS AND DISTRIBUTORS DISCOUNT Discounting as a pricing tactic is as old as the sales profession itself. Your ever-demanding customers are after a good deal and your salespeople are gagging for a quick win. Offering specially-reduced prices can be powerful, there’s no denying it. We’ve all seen the hordes of people racing to supermarkets on Black Friday, elbows firmly engaged and ready to holler at any unsuspecting fellow shopper that might dare to reach for the same toaster as them. In reality though, discounting is killing your business, with every cent you knock off your list price for a what will be a very short-lived spike in sales. The wholesale distribution industry is one rife with competition, competition that will likely have the same product or one very similar to yours on offer. In such a bustling market, your customers are all powerful and they can chip away at your bottom line with very little effort, playing you against your competition in a never-ending price war. So it’s not surprising that many wholesale distributors think the way to see light at the end of the tunnel is to cut prices to get a deal over the line. 1 www.sales-i.com

3. Don’t wage a price war: why discounting is killing your business Who should dictate your pricing? Things to establish before setting a price: Who dictates your pricing? Theory suggests that your marketing team should control and dictate the pricing of your products. Let’s go back to your high school Business class. Remember the 4Ps that your teacher probably prattled on about for at least a couple of lessons? These 4Ps of the marketing mix are what the crayon-wielding, creative ninjas live by: product, place, promotion and PRICE. Your boss? Your sales director? Your finance team? More often than not, senior management will dictate pricing and simply force this onto your sales team and subsequently your buyers. However, without any understanding of the pricing strategy you should be adopting, setting a price can end up being nothing more than a shot in the dark for most departments of your business. 1 What value will your product or service bring the buyer? 2 Are your customers price sensitive? Your marketing team will always have an ear to the ground. They know your customers inside out, your market like the back of their hand and competitors like their closest friends. Your sales director will likely look to set the price as high as possible to generate the most revenue, the same goes for your boss and your finance team. 3 What are you doing differently to your competition? A bit of market research here, some sneaky competitor analysis there – your marketing team really are in the best position to dictate your pricing. A price too low and you’ll be throwing money away; Too high and you’ll see a dip in sales volume. It’s a tricky game to get right and should involve a team that know what constitutes an acceptable price for your customers. 4 Is your customer willing to pay $XYZ for your product? This doesn’t mean that your management team or finance gurus should be left out altogether, but marketing should have the overarching ability to dictate the price of your product or service depending upon seasons, trends or competitor activity. 5 How much margin do you need to make selling your product worthwhile? When coupled with a smart value positioning and some really intriguing promotion, price can end up being one factor of many, rather than THE deciding factor for your customers when they’re in the market for your products. 2 www.sales-i.com

4. WHY IS DISCOUNTING KILLING YOUR BUSINESS?

5. Don’t wage a price war: why discounting is killing your business Discounting, no matter how marginal can, and will, kill your business. A bold statement, we know. We’re all material people. We like stuff. And we like to get said stuff at the best possible value. But good value doesn’t always mean the lowest cost. Discount to the detriment of long term profits While great for short term sales spikes, discounting will ultimately hit your long-term profits hard. In discounting, you’re not fostering a long-term relationship with your customers – you’re having a fling with a ‘deal shopper’ who won’t ever call you back. Plus why should the fly by customer pay less than an existing customer who gives you repeat business on a regular basis? Customers will bide their time for lower prices If you’ve discounted before, chances are you’ll consider doing it again for that elusive spike in your sales volume. Your customers are savvy beings and will wait patiently for you to discount again. Think of Black Friday, people bide their time knowing that a discount is coming soon. Your sales will tail off in periods when you’re not offering discounts and only spike when you cut your prices. But when your customer utters the words “how much is it?”, your answer as a product salesperson can (sadly) dictate the future of your deal. When followed swiftly by a sharp intake of breath and “what can you do on the price?” many salespeople will “see what they can do” and usually offer some form of discount package, shaving dollars off your margins. You’re commoditizing your business In the wholesale distribution industry, intense competition comes with the territory. But undercutting competitors won’t do you any good. Low value products can in turn lead to a low value company with customers fixated on price with low expectations and little to no engagement with your brand. You’d never refer to your products as mere ‘commodities’ so don’t start commoditizing your business with discounts. Do you want to be a discount brand? Lowering your prices essentially makes you one. Discounting heavily can damage your brand and sully everything you stand for as a company. Most people value things based on price and knockdown prices can give your customers the idea that you’re becoming a discount brand. If that’s not what you’re aiming to do, will your customers be willing to step up and pay full price when you’re not discounting? It’s killing your business. Here’s why. Raises uncomfortable questions Say you cut prices by 20%. The question on your customers’ lips won’t be “Where do I sign?”, instead it’ll be “What was your mark-up beforehand?!” It’s not a question any wholesale distributor ever wants to be faced with, is it? If you’ve got the ability to slash prices at a moment’s notice, customers can become wary about how much profit you were making before, making you unstrustworthy. More discount = less profit Imagine your profit margin is 30%. If you’re offering a 20% discount, your profit margin then becomes 10%. As the cost of raw materials continues to rise, along with sharp increases in labor costs, can you really afford to cut your prices? In short, you’ll have to increase how much you sell to maintain the same level of revenue. Meaning more production costs, more time and a lot more effort. 4 www.sales-i.com

6. Don’t wage a price war: why discounting is killing your business HOW TO AVOID THE PITFALLS OF DISCOUNTING you can rejig your positioning and offer a product they can’t live without. Sometimes it can seem like there’s no alternative but to offer a discount to secure a sale. With the threat of your competition ready to lure away your customers as soon as you deny their request for a discount, how can businesses today really say no? Make your product a ‘must have’. Make it easy for your customer to get pepped up and excited about your offering. They’ll be so swept away in the excitement that the price will be an afterthought. Competing effectively means doing more than just offering a cheaper deal. Have competitive prices by all means, but there are things you can be doing to avoid the pitfalls of discounting and make a difference with your customers. Add value This ties in nicely with the previous point. As a wholesale distribution salesperson, you need to understand exactly where your company’s offering fits in with their day-to-day lives. How will it change their lives? Will it save them time? Money? Effort? Increase your product range A wide product range can encourage your customers to spend more of their money with you. If you’re selling, for example, nuts and bolts to your customers, broadening your product range to include washers, screws and tools can incite your customers to spend more money with you. A wider product range makes it easy for them to get everything they need from you. Knowing precisely what your product can bring to the table will make those hellish price negotiations a thing of the past. Remember that a lower price doesn’t always mean better value, in fact a higher price is often attributed to superior quality. Let your customers do the talking Your existing customers are your biggest weapon when closing a sale. Already advocates of your brand, sharing case studies, testimonials, videos and references from people already using your product or service can be a game-changer when you’re selling. Hearing how good your offering is from other users is incredibly powerful. Think of the likes of Walmart and other traditional grocery stores. They no longer sell just groceries; you can pick up pens, clothes, TVs and even garden furniture at most superstores today. Sharpen up your positioning Make sure you fully understand your buyers. What are their challenges? What makes them tick? What are their goals? Armed with this knowledge, 5 www.sales-i.com

7. EXAMPLE OF DISCOUNTING GONE WRONG

8. Don’t wage a price war: why discounting is killing your business Franchisees of the fast-food giant McDonald’s claim that they are being forced to offer too many discounts. Getting customers through the door and making profitable sales are two very different things. As private investors in McDonald’s franchises, these individuals are reporting huge losses compared with the same quarter of last year simply by reducing their prices. 271 Restaurants taken part in the discounting scheme. 0.2% Growth slowed by 0.2% in the third quarter. While this doesn’t directly impact customers, it’s clear to see how discounting can negatively affect a company’s bottom line. If companies the size of McDonald’s feel the pain of discounting, what’s to say your wholesale distribution company won’t feel the same? 0.8% They expect a 0.8% decline in sales in the fourth quarter. MCDONALD’S Instead of discounting, look to McDonalds’ famous up-sell: “Would you like fries with that?” This simple question must have made the company billions over the years; is there a similar question you could be asking? $15 Labor costs on average $15 per hour meaning discounting can be difficult. 7 www.sales-i.com

9. EXAMPLES OF BRANDS THAT DON’T DISCOUNT

10. Don’t wage a price war: why discounting is killing your business Apple Louis Vuitton Tesla Technology giant Apple has never offered a discount. Yet come iPhone 8 release day, you can guarantee people around the world will be camping overnight to be first in line to buy one at list price (or even more on eBay when stock is low). Apple products have become a cult item that customers are willing to pay for. From the experience in store to aftercare and support, Apple doesn’t offer discounts to its customers because they just don’t need to. Luxury fashion brand, Louis Vuitton will never offer a discount. Having faced near bankruptcy in the early 1970s due to private franchisees marking up prices on their luxury handbags and luggage and pocketing the difference. After a swift management shakeup, Louis Vuitton became a vertically integrated company that today owns their entire supply chain from factories to shop floors in department stores. Customers can’t purchase Louis Vuitton products anywhere but official outlets or authorized concessions – making it impossible to discount. Business magnate, founder of Tesla, Space X, SolarCity and Paypal and all round nice guy, Elon Musk is one of the greatest and most humble businessmen of our generation. Musk recently penned a lengthy email to his Tesla team about the very reasons why they never offer a discount on their cars. It’s worth the read. We promise. “The acid test is that if you can’t explain to a customer who paid full price why another customer didn’t without being embarrassed, then it is not right.” “It’s up to us to convince people to maybe spend a little more for a materially better experience of product. And we think that people will do that if the product is great and if it’s messaged appropriately.” - ELON MUSK, FOUNDER OF TESLA (...AND OTHERS) “Controlling the channel meant you controlled the price. Without a middleman, margins are higher, offering a plumper profit cushion during downturns. This practice also confers exclusivity, since you can buy a given product only from an authorized dealer where price is fixed.” - TIM COOK, CEO OF APPLE 9 - HENRY RECAMIER, 1977 OWNER OF LOUIS VUITTON www.sales-i.com

11. Don’t wage a price war: why discounting is killing your business STATISTICS 67% Offering discounts means poor loyalty and loyal customers spend 67% more than new ones with repeat purchases . Source: www.inc.com 40% Promotions often have little impact on buyers – 40% would have bought an item anyway, promotion or no promotion. Source: www.inspectorinsight.com 1% A 1% pricing discount results in a decrease of 8% in operating profits for the average company. Source: McKinsey & Company 8% If volumes remained stable, a price rise of 1% would an 8% increase in operating profits. Source: McKinsey & Company 10 www.sales-i.com

12. Don’t wage a price war: why discounting is killing your business How discounting eats into profits A pricing strategy is something that’s often decided without much thought within many businesses. It’s not an easy task to get right, but business owners often fail to anticipate how quickly profit margins can disappear when they give away a harmless concession here and there such as 10% off their usual list price. Costs 80% Costs 80% For a business with a 20% gross margin, a 10% discount gives away 50% of their profits as raw materials and operational costs remain the same. Is a 10% discount going to increase sales by 50%? Probably not. Discount10% Profit 80% 10% Profit 11 www.sales-i.com

13. Don’t wage a price war: why discounting is killing your business TO SUMMARIZE In short, discounting is bad. Adding value is good. Knowing your customers inside out is key to providing an experience that will keep your customers coming back for more and negating the need to cut your prices just to get that elusive “yes”. Be more proactive in your sales approach and pre-empt your customer’s next purchasing move. Using sales technology can help you to be more proactive you’ll be able to avoid those awkward discount conversations altogether. This kind of software can help you to get ahead of your competition before they even have a chance to undercut you and start a price war. What’s more if you’re being more proactive towards your customers, they’ll trust you more and in turn become more loyal. If this is the case, even a low price won’t be effective in securing their business. Some of the most successful companies in history have never once offered a discount and they’ve stayed true to their morals. A quality product that will help improve or better any aspect of your buyers’ lives shouldn’t need to be discounted. 12 www.sales-i.com

14. Don’t wage a price war: why discounting is killing your business ABOUT We are the leader in sales performance for distributors and wholesalers. “It is a no brainer for distributors, and the personal service is outstanding.” - Scott Bennett, Bennett Auto Supply “One call using sales-i yielded a $5,000 order from an account that was leaving us for a competitor, he felt we did not care, sales-i showed him we did.” sales-i is sales performance software designed to make every sales call more personal and profitable. sales-i enables sales professionals to clearly identify and target high quality sales opportunities within their current customer base. Equipped with customer buying behavior alerts, salespeople can make insightful, personalized, quick business decisions, realizing repeat sales, reduced customer attrition and maximized profit margins as a result. - Ron Dahlhaus, Buy Wise Auto Parts “We’ve closed off the financial year 58% up on the previous year and attribute this directly to sales-i and their sales performance software.” sales-i will change the way you sell. Get in touch for a free, online demonstration and judge our software for yourself. - Larry Sexton, Office 360º tellmemore@sales-i.com www.sales-i.com