How to Add Value Instead of Discounting
While discounting has its place in world, many small business owners don’t understand the impact it has on their bottom line. There are many other strategies that offer increased value without the high costs of discounting.
Far too many businesses turn to discounting without analysing the actual costs to their business. More often than not, it leads to costing a business instead of bringing in profits. Look at how a 10 percent discount can take away up to 50 percent of net profit, while a 10 percent premium can increase net profit by up to 50 percent.
| 10% Discount | % Sales | Listing Price | % Sales | 10% Premium | % Sales | |
| Sales | $900,000 | $1,000,000 | $1,100,000 | |||
| COGS | $500,000 | 56% | $500,000 | 50% | $500,000 | 45% |
| Gross Profit | $400,000 | 44% | $500,000 | 50% | $600,000 | 55% |
| Overhead | $300,000 | 33% | $300,000 | 30% | $300,000 | 27% |
| Profit | $100,000 | 11% | $200,000 | 20% | $300,000 | 27% |
Although the figures in this example do not apply to all businesses, the lesson does. In a nutshell, discounting by 10% can literally cut your profits in half. The cost of the discount is not 10%. Then, you also need to consider the number of extra sales you require to recoup the loss of profits.
By adding a premium of 10% (all other factors remaining), you can essentially increase your profit by 50%. However, most businesses need to add extra value in order to increase their prices, in which case the cost of the added values needs to be factored in. The reality is, the cost of added value is far less than the cost of discounting.
The drop in your net profit caused by discounting has a direct and immediate negative impact on your business. Discounting also has a larger long-term effect on the customer’s perception of your brand, your products and services. Discounting destroys this value over time like a virus. Much like respect, it takes years to build and moments to destroy and that value is extremely important to the long-term success of your business.
Think about what a discount implies. It can show a lack of confidence in what you’re selling, it can give the customer the power to negotiate even further from what you’ve already discounted, it can show desperation, inexperience, or worse.
Groupon or other heavily discount driven strategies attract customers who are out for a bargain. Are these the best customers for your business?
Probably not.
They will only shop with you if you offer a significant discount of 50% or more. Try putting that type of discount into the model above and see what it is truly costing you! Your sales team should be working to sell the value in other ways than discounting. From lead generation to closing, they should be communicating that your products and services add real value to their lives.
So… How Do you add value instead?
One of the best ways to add value to your products and services without discounting is through optimising your sales process and overall marketing strategies. CRM software systems can help you build a better relationship with your customers and increase loyalty without discounting. Using an effective CRM system, you can improve the conversions on lead generation efforts by carefully segmenting contacts and nurturing your relationships. Great follow up and nurturing can increase sales conversion dramatically and doesn’t cost the business much at all either.
Here are some other quick tips on increasing value instead of discounting.
Your lead generation processes can become quite inefficient and unorganised without checking in on them. You can position your sales efforts to increase conversion rates without discounting. You can add value by spending more time learning about your target customers by asking these questions; What are their challenges? What are their goals? What will help them buy more from you? How can you service them better?
It is also important to provide proof behind the effectiveness of your products or services in meeting your target customers’ needs. Social media, engaging content, website testimonials and videos can all give your sales team the tools they need to build value without discounting.
Identify what represents value to your customers and give it to them as added value. Help them build their business in innovative ways that are of value to them. For example, marketing consultants that understand who valuable connections for clients are can use internal marketing strategies such as LinkedIn networking to introduce potential referral partners or affiliations to their clients. For local clients, they share news on networking events that will be of value. Neither of these strategies cost much more than some time they are already investing, but the value can be significant.
In short, take time to consider value adding strategies that not only saves you a lot of profit, but can seriously increase your bottom line. If you’d like to discuss appropriate value adding strategies, reach out!
