Discounting prices is a common every-day occurrence for many manufacturing and distribution companies. But, excessively discounting prices kills margins. In some industries, discounts are expected as a part of doing business on every transaction. The discount culture is manifested over years of practice by industry participants. To a great extent, as suppliers to a marketplace, we create these price discount cultures and encourage the practices by continually offering discounts at every turn.
On the upside, price discounts may support revenue goals. Conversely, on the downside, they cut profit margins. Maintaining a balance is crucial to maximize business performance.
Changing this culture doesn’t come easy. It takes time and commitment to adopt price integrity. That being said, discounts certainly have their place and should be used carefully to support revenue goals.
So, how do you know when you may be discounting excessively? We first look at sales teams and their behavior to get an indication on the extent of discounting. Often, the sales team is where the discount originates in an attempt to close a sale. Here are five situations where your sales team may be telling you that your price discounts are out of control. Do your sales reps…
· Have the authority to discount prices…even just a little?
· Get compensated in whole or in part on the basis of their sales volume?
· Tell you that your prices are too high?
· Ask for last minute discounts to close the deal?
· Give away free products or services?
If you answer YES to any or all of these, you may be losing a significant amount of profit margin through the sales organization. Unnecessary discounts at the sales level cost manufacturers and distributors an average of 2-4 margin points every year. In fact, we’ve seen companies lose as many as 10 margin points as a result of excessive discounting. Margin leaks at the sales level are one of the most over-looked and under managed threats to profitability.
Do you have a price discounting problem? Call the pricing consultants at PricePoint Partners to learn more about stopping price leaks and lifting margins.