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Best Practices Investing Personal Development Sales

Your 2019 Resolution: Control the Suck of Discounting Expense

There is almost nothing you can do for your business with a higher financial payback than getting your arms around your discounting practices. I want you to make a New Year’s resolution to put rigor and discipline around your discounting (some call it “pricing exceptions”) policy and processes.

Why is this so important for your business?  Simple math.  When you sell your product or service to a customer, your costs to fulfill your part of the deal are the same—regardless of whether you discounted or not.

Discounting changes only two lines on your P&L statement: the top line and the bottom line.

When you grant a discount, every dollar you surrendered comes off of your bottom line, and goes to the customer’s.

For an operating business, your profits are made at the top line.  A pricing and/or discounting decision is what drives profits.  Once you see a number on the bottom line, it’s too late to do anything about it.  Discount expense sucks the life out of companies.

Resolution Part #1. Take Stock of Your Current Discounting Practices.

I am thrilled to help my readers analyze where their discount dollars go and their system for allocating those dollars. Let’s examine how you make discounting decisions together.  If you’d like to prepare, or go through the exercise on your own.  Some of the questions we’ll go through:

How many discount dollars do you spend per year?

  • Formal, through an exception process?
  • Invisible, through salesperson autonomy?
  • Does everyone in your company know that discount dollars=profit dollars? Do they act like it?

What is your price exception/discount process now?

  • What are the steps?
  • Who are the players?
  • What information/documentation is used?
  • How is the discount justified?
    • Is customer value measured/characterized? How?
  • Do you always know what the customer thinks of yours andthe competitor’s value (or just their price)?
  • How consistently do your people follow your process?
  • Have you (or can we) analyze how discount dollars are distributed? Are there concentrations by territory/salesperson, region, customer, industry, time of year?  Can we explain any apparent anomalies?
  • What do we get in exchange for price concessions?Are there any salesperson/regional/market trends in that data?

What These Questions Uncover.

The first thing we’ll discover is how well you track discount dollars. Since every one of these dollars is also a profit dollar, you need to know where every one goes. If you don’t know where your discount dollars go, your business is leaking profits.

The questions above help both of us understand how you make pricing and discounting decisions, where the discount dollars go, and if there are any suspicious trends.

Are my discount dollars being over-allocated toward:

  • The whiniest salespeople?
  • The favorite salespeople?
  • The whiniest customers?
  • A certain market?
  • At a certain time of the month/quarter/year?

That last one frustrates the heck out of me: I’ve held P&L responsibility, and have never felt that an unprofitable booking this month beats a profitable booking next month.  I’d feel that way even without the perversion of what month-end discounting teaches my customers.

I also want to explore the basis of discounting (whether/how much) decisions.  Squeaky wheel?  Best at gaming the system?  Price-based? Or…value based?

The Gold Standard of Discount Systems:  Customer Value Based.

99% of the time you hear “your price is too high”, what the person is really saying is either “your value is too low”, or “I’m inviting you to help me understand your value”.  I specialize in helping my clients have those discussions effectively. I can point you to a methodology which will steer those conversations toward value and away from price…and certainly away from unnecessary discounts.

If you have a solid methodology for understanding customer value, some great things happen to your discounting practices:

  • Discounting is purposeful. It no longer feels as random or arbitrary.
    • Your people will understand the system and feel more fairly treated
    • You might quiet the squeaky wheels; the people who scream the loudest for discounts.
  • You will be confident in your discounting decisions.
    • You’ll make better decisions about product enhancements, market entries, even market exits.
  • You will discount less and profit more.
  • You will produce more accurate forecasts. Knowing customer value is the same as knowing customer motivation. When you truly know value, you are intimately engaged with the customer’s innermost buying decision dynamics.

Resolution Part #2. Build A Value Based Pricing/Discounting System.

I can help you if you want.  Here are some options:

1. I’m feeling pretty good about the latest draft of my book on the subject.  If you’ll give me merciless feedback on it, I’ll send you a .pdf copy to review.  The book will guide you toward developing a better pricing/discounting system.

2. Let’s talk. Reach out at mark@boundyconsulting.com.  If you want to work toward a system together, prepare for our call by looking through the “take stock” questions above, and  prepare any questions for me.

Whatever you do, and however you choose to get help, please do it. The road to failure is paved with poorly justified discounting decisions.  I want you on a better path.

To your success!

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Leadership Marketing Personal Development Sales

How Economics Betrays Business Leaders Every Day

I hear even highly-respected consultants and business leaders express dangerous misconceptions about price and discounting. I suspect it’s because so many people took basic economics to heart without digging deeper into the underlying assumptions or learning the true role of pricing. No thanks to economics, we often mis-

apply the supply/demand relationship we learned in our introductory Econ courses. You could not make a bigger mistake.

The demand curve is a foundational concept in economics. The law of demand states that lower prices incentivize higher demand (in units). The principle is correct, but only under artificial conditions. Rather, my decades of work in pricing and value have driven a conclusion that most businesses grossly mis-apply supply/demand analysis in the real world.

I’ve met multiple sales people, sales leaders and CEOs who rationalize indiscriminate discounting. Presumably, they are relying on a misunderstanding of the demand curve. This is far more than mere misinterpretation of the law of demand; it kills businesses.

Let’s review: the demand curve represents aggregated behavior of for a commodity: as price falls, additional customers appear, willing to pay the lower price.

Does dropping your price really help win that deal?

The demand curve correctly states assumes that value for your offer is different for each individual. Prospective customers compare any given price against perceived value. As price drops, demand increases when a customer who formerly perceived inadequate value now perceives a positive value from purchasing. Unfortunately, when you capture a sale from that marginal user who perceives borderline value, you simultaneously just trained all of your higher-value users to expect discounts.

While the perceived value of a product or service can – and is – often individual, it isn’t fixed. Value is a perception, and perceptions change. Perceptions of desirability of an outcome, adequacy of substitutes, and environmental/extraneous considerations change constantly. In fact, this is why the sales profession exists.

Drop your price without knowing your value? Stop it!

The demand curve assumes that your product or services is a “fungible” commodity: all units of the same product or service are identical replacements for each other.. That is, it assumes that you have no differentiation. This is ridiculous. For instance compare the price of a one ounce pure gold bar from a no-name mint vs. a one ounce Krugerrand. The demand function you learned in school ignores differentiating features, branding, distribution, availability, support/service, durability, etc. This was done so that the math works more easily. While there is some great advanced economics work that incorporates differentiation, you probably never learned about it. Pity.

Another way that the real world differs from economic models: Customers don’t have perfect information. When your customers don’t know about all alternatives, don’t fully understand value-in-use, or all the ways that your offer provides value to them and their company, they don’t make “economically efficient” decisions. Imagine a prospect who hasn’t figured out that ROI for a contemplated purchase is over 500%. Discounting isn’t the missing selling behavior…it just creates a discount-accustomed buyer. Or worse, makes them question any value which they had placed in the service. Worst of all, there was no reason to discount, and that every dollar of price drop came out of the seller’s profit line.

For these reasons, you should shift a marginal customer who perceives inadequate value to tip in your favor. This avoids the collateral damage to your existing customers willing to pay your existing price.

Your price isn’t just the effect, it’s the cause.

Your price isn’t just a cost figure a customer weighs against your offer’s value. Because of the confusing plethora of differentiation in the real world, consumers use price as an indicator of value. Your price declares your value — or your lack of it. Imagine: you are the incoming CEO of a company that outgrew its peers for decades at a price premium and without discounting before you entered the job. When you encourage sellers to start discounting to “win” deals, what do you think you’re doing to the brand?

My work on value and price

Bottom line: discounting to gain sales is only a smart choice if you, your marketing group, your customer service people, your product group, and your sellers are all powerless to grow customer perceptions of value. I help under-powered clients.

When I work with clients, we usually find that their offers are priced well below the customer’s true value. This doesn’t necessarily mean we raise prices, but almost always helps them see that discounting is merely shipping profit dollars out the door to their customers.

Don’t be “that guy”. Or “that woman”.

The only kind of value there is: customer-perceived value. It’s impossible to have value that the customer hasn’t validated yet…you don’t have value; just a value proposition. Customer-focused conversations and interactions which get your prospects to validate value is the difference.

I’m happy to help you on your journey to understand how you can capture the value your company earns in the form of pricing power. Comment below or reach out to me directly to discuss in more detail.

To your success!

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