Sales - Discounts to Oblivion!

If you have ever been caught in a discount war, you will know that the results are often very unpleasant and stressful and can severely damage the health of your business. Although most businesses use some form of discounts for limited periods, a venture that depends on discounts for business will most likely fail. If not managed correctly, discounts have a nasty tendency to take control of a business.

Commodity businesses are most likely to get caught in the discount spiral downwards. With little to distinguish themselves from their competitors, they quickly resort to promotions and discounts when the going gets tough. What they fail to understand is that their competitors have to follow suit. The result is a downward spiral of decreasing margins as they fight for market share.

Nothing demonstrates this better than the competition in the family car market some while ago in the United States. The big US car makers - General Motors, Chrysler and Ford - have been suffering in recent years. Increased competition from foreign car makers, recent increases in oil prices and poor labor relations have taken their toll. This has been exacerbated by rising health insurance costs and the expense of funding the pensions of retired employees. GM kicked off the discount war to clear excess inventory by offering "employee discounts" to the public. Basically, anyone could buy a GM car at the same price as a GM employee, something like a 25% discount.This remarkable offer resulted in GM booking it's highest monthly sales for several years.

One month later, Ford and Chrysler introduced similar discounts. Although all three companies had record sales over the next month, it came at the cost of their gross margins. What was fascinating was that none of the foreign car makers participated. I wonder whether the big three US car manufacturers were simply taking business from each other rather than from their most dangerous competitors.

The greatest danger in offering discounts is that they become the norm and the business can never go back to its previous prices.

Some large department stores are expert at managing limited-time discount sales, where special product lines, signs and layouts are used to indicate a sale, and then it all disappears at the end of the sale. Airlines manage discounts by attaching them to special conditions. Unless you meet the criteria and agree to the special terms, you do not qualify for the discount. This allows them to pick up marginal business or achieve other financial objectives without unduly undermining their high-margin fares. Criteria and conditions can be changed over time to make longer-term comparisons more difficult. Special offers can be altered over time to manage revenue.

So when you are continually being harassed by customers you ask, "Which part of our service do you not want so we can cut the price?" Basically, if they can show you where cost cutting can be made in service, you might be willing to pass on this saving in the form of a lower price. Of course, the customer wants it all and your argument is that you can not provide the level of service that they require if you cut corners.

It is always more effective to spend your energy on finding different ways to improve margins than giving them away.

Improving margins will have a long-term positive effect on business resilience and profitability. Discounts neet to be handled with extreme care.

Tony Martin - Director - Strategic Financial Coach