Paying the Price for Discounting

When times are tough many UK firms react very quickly and discount prices across the board without fully understanding the impact on demand or profitability.  The results should be dramatic and immediate.  But so is paying the price for discounting.  Many industries and companies using discounting fundamentally erode the total value of the market.  Buyers’ and consumers’ price expectations are lower and buying behaviour changes, perhaps forever.  Just look at what is happening to the big retailers over the past 2 to 3 years.

When survival is the key driver, dropping price is an understandable response by the sales force, especially as sales volumes fall. This might be the right thing to do if the product or service you’re selling is price elastic and so long as a reduction in price will increase sales volumes.  So is that good news?

Discounts are usually driven not by an understanding of market dynamics but by sales force incentives.  Sales teams are frequently measured by sales volume, rather than the quality of the revenue they bring in, i.e. profitability.  If a salesman is rewarded for selling more, then the easiest way to achieve that objective is to discount prices.  This may not be the best in the medium term for the business.

All companies, and in particular SME organisations need to look at their pricing processes and controls to ensure their pricing strategy is effectively implemented, reviewed and managed.  Performance metrics should be linked to profit as well as volumes and appropriate controls should be embedded such as target and limit prices.  For example, a stepped approach to discounts based upon actual spend (not planned spend) incentivises every-one.

So if you have to offer discounts, be aware of when, how much and to whom – and equally important for how long. Have you had a conversation with a current customers about levels of discounting and tried to justify what is being offered to them or other companies and why?  It is a very difficult subject to discuss and explain rationally, so be prepared.

If you wish to discuss how to structure pricing and incentive plans that help sustainable growth, or if you would like to explore how CMC can support you through your business journey, contact us via the form below.

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