What happens when you discount? A practical example
One of the problems I find working with salespeople is the tendency to offer discounts.
I firmly believe it’s a common problem we salespeople have and it’s due to several factors for example a lack of a structured training, continous coaching or a methodology which allows us to keep the sales process under control.
There’s another element which amazed me: most of us offer discount because we don’t know the consequences.
In other words, we don’t know what happens every time we offer a discount.
Let’s be clear: this article won’t tell you that you never have to give a discount suggesting any kind of persuasive technique.
B2B sales are usually complex and if the agreement changes other terms change, sometimes the price too.
This article wants to underline the effects of the discount in the long term.
Let’s make an example: management asks for more revenues and salespeople asks for more discount concessions in order to win the market and beat the competition as fast as possible.
According to the sales department, this will generate higher volumes even if cutting the margins.
It’s forward that cutting margins only works in the short terms and can be repeated just a few times before a company ends up with a weakened brand, a lower perceived value, a trend to the commoditization and a near zero profit condition.
Let’s assume we have an 8.000 Euros order with a 30% gross margin.
In this case margin will be:
- 8.000 Euros X 30% = 2.400 Euro.
A 10% discount yields a 7.200 Euros order with a new discounted gross margin revenue of:
- 2.400 Euros – 800 Euros (the 10% discounted amount) = 1.600 Euros
1.600 Euros is 22% of the 7.200 Euros sale, the news discounted gross margin percentage.
The new order volume required at a 10% discounted price to produce the original 2.400 Euros of gross margin is:
- 22% X New Revenues = 2.400 Euros
‘New Revenues’ are what we want to calculate, so:
- New Revenue = 2.400 Euros / .22 = 10.909 Euros
10.909 Euros is the 136% of the initial order of 8.000 Euros at a 10% discounted prices to recover the original 2.400 Euros of gross margin.
As you can notice even behind a small 10% discount there’s a complex world with loads of consequences.
According to what I said before, in these cases it would be helpful to have a structured training, continous coachingand a methodology which allows the salesperson to create value since the beginning and keep the sales process under control.