One of the most important lessons is understanding gross margin. It’s the difference between total sales and total cost. It’s what you get from the sale minus what you spent on the goods, basically. It’s money in your till. Not that it stays there for long. You still have to pay commissions, bonuses, dividends, salaries, travel and motor expenses, office lease, Internet and phone bills and taxes. All of your expenses come out of that margin. The more discounts erode the margin, the less it leaves for you or your company.
The one and only secret of long-term success lies in keeping your margin as large as possible. The only person who can control the gross margin is you yourself. It might be game over in 45 seconds if you offer a harmful discount. Is it worth it?
If you have a 40% margin, and you hand away 10%, you’re sowing the seeds of your demise. To maintain the same margin, you should increase your sales…how much, do you think? Well? Just ten per cent? No, check again – by a whole third. 33%. Painful.
But that’s not all. With a 20% discount, you have to double sales, and with a 30% discount, you have to quadruple sales. Pretty rough, isn’t it?
But let’s play a little with figures. Even many companies don’t have a 40% margin. It’s often smaller. Let’s say it’s 30%. If the client asks for 20% discount and you give in, you give away 66% of your total earnings. With the rest, you have to earn back expenses, pay rents and wages and so on.
If you find that prices should be lowered, do it on the partner level or explain to the CEO why a certain customer should get a discount, but don’t do it if you are face to face with the customer and the customer demands it. Stay firm and defend your price with every weapon in your arsenal.
What message do you give a customer with a spontaneous discount, one that the customer has extorted from you? A simple one – “our product isn’t worth the marked price!” Actually, you’re saying the following about your company:
“You know, I don’t really believe my products and services are worth their price. (And here’s a little secret: we’ll offer you a discount and actually still earn profit on you anyway, ha-ha.)
or: “I myself don’t see the value in what I’m offering my customers. What value? Our only value is the low low price.”
Or: “I have to make my quota! Please buy my stuff, I’ll do anything!”
Ugh – pretty ugly, isn’t? But those are the subconscious signals you’re sending clients – that you’re ready to come down in price as soon as the negotiating begins.
There’s a massive mentality of tossing out discounts as soon as they come in the door. For example, a friend went to a well-known kitchen furniture company and the first thing he heard was: “We can give you a 30% discount!” It seems enticing, but the customer wasn’t even ready to look into the price yet! He was interested in whether they could offer him the kitchen counters he wanted. He would have made the purchase at even less of a discount because he’d ordered from there in the past and was satisfied with the quality. The sales consultant failed to earn much of a profit by simply sacrificing it right away.
If you find your products aren’t worth anything and don’t offer customers any benefits or income, there’s only one way out – offer a discount.