The following is a guest post by Dale Furtwengler, author of Pricing For Profit: How to Command Higher Prices for Your Products and Services.
Is Discounting Ever Appropriate?
It is……the key is to knowing when and how.
Here are threesituations in which offering discounts make sense, but only if you employ the strategy associated with the discount:
Opening the door:
I’m sure that this has happened to all of you at one time or another. You’ve identified a potential customer. You’d really like their business, but they keep telling you that they’re happy with their current vendor.
Your natural inclination is to lower your price to get their business. Is this the right approach? Partially. Typically what happens is that you shoot them a low price to get their business, then find yourself locked into that pricing later when they balk at a price increase. Why do they balk? It feels like the old bait and switch tactic to them. How do you avoid this problem?
1. Tell them that you understand that they’re happy where they are. They appreciate the fact that you’re listening.
2. Go on to tell them that you realize that you need to give them a reason to try your offering and that there is risk associated with that.
3. Offer them a discount to entice them to take that risk using this language – “I realize that you need a reason to give us a try so for this order only I’m going to reduce the price to ___. I’m so certain that you’re going to be thrilled with our offering that you’ll gladly pay the higher price in the future.” How’s that for a statement of confidence?
4. Put your offer in writing emphasizing that the price is for this order only. Do the same with your invoice.
5. Once you’ve won the business charge your usual price.
Retaining competitive advantage:
Intel and Hewlett-Packard were both very good at this. For decades Intel had a knack for beating its competition to the market with faster and more reliable chips. Hewlett-Packard did the same for in its printer division. Both charged premium prices until their competitors were about to launch competing products. That’s when they lowered their price.
That’s a very successful strategy. It not only allows them to generate huge profits when they don’t have any competition; it allows them to prevent their competitors from getting a similar return on their R&D investments. These additional profits made it easier for Intel and HP to maintain their competitive advantage. Coupled with effective marketing campaigns like ‘Intel Inside’, Intel and HP became the industry standard – the offering most buyers wanted regardless of price. Isn’t that where you want to be? You can! You already know how your offerings
outperform your competitors’ offerings.
Meeting budget constraints:
Sometimes the prospect really wants what you offer, but can’t quite afford it. The natural inclination of sellers is to lower the price to make it more affordable. Bad move – unless you’re asking the customer to give up something as well. Here’s a classic example. One with whichI’m sure that you’ve had experience.
You go in to the showroom to buy a car. You find the one you want and the negotiation begins. You tell the salesperson what you’re willing to pay, they counter with a higher price. On and on it goes until you agree on the price. The only thing that’s changed is the price. The car is exactly what you wanted from the start.
With that scenario in mind, how often have you walked out of the dealership feeling that you got a good deal? Most of us don’t. Why? The car didn’t change! Consequently we feel that the dealer was trying to get into our knickers and we can’t help buy wonder if he did.
What approach should that salesperson use? If, as you made your offer, the salesperson said “Unfortunately, I can’t afford to sell that car to you at that price. I understand that we all have budgets with which to contend and that this car doesn’t fit your budget. If you’d be willing to forego (the moon roof, alloy wheels, heated seats, etc.), I could meet your budget.”
Now the buyer is faced with a choice. Do I want that moon roof badly enough to pay …? Either way, you’re forcing the buyer to make conscious choices which is in both his best interests and yours. The more you help buyers understand the choices they’re making, the greater the service you’re providing and the satisfaction your buyers will experience.
It’s counter-intuitive, but there are only a few situations in which discounting makes sense and two of the three involve require buyers giving up something to get the lower price. Now that you have a sense for when and how to use discounts, we’re going to spend the next ten weeks or so, exploring the most common pricing errors that business owners/leaders make.
DALE FURTWENGLER is President of Furtwengler & Associates, P.C., a consulting firm dedicated to helping small businesses increase profits without adding resources. He is the author of Pricing For Profit, Invaluable, The Uniqueness Myth, Making the Exceptional Normal, and Living Your Dreams. For more information on how you can command higher prices for your products and services,please post your questions or comments below, or send Dale an email @ email@example.com.