The real cost of price discounts

One of the most frequent training requests I receive is for sales teams to learn how to negotiate. It seems in this day and age, securing a satisfactory result through negotiation is a key business skill. There is no question that negotiation can be critical in securing a satisfactory conclusion to a long and complex sales process. However, as I am always quick to point out, negotiation is also a very costly strategy and shouldn’t be undertaken until everything else has been done to reach agreement.

To put this simply, a salesperson should be trying to sell products or services to his custo-mers. Using professional selling skills and providing he is successful, the salesperson will be able to convince the client to buy. Part of the skill of selling is justifying issues such as cost, time, delivery and terms with the customer.

The most successful salespersons treat each sale as a complete process arriving at the decision to buy without giving anything away. Their approach (the correct one) is that if they can sell their product to one customer at a particular price, there is no reason why they should go back into the market and offer the same item to a different customer at a lower price.

Some years back, I recall sitting with the owner of a large company at a formal dinner. During our conversation, I learned he had bought the same model of car yet he had paid over P50,000 more for the car. Sure, he was able to negotiate free tint, LTO registration, car mats and other extras that are usually given away. On the other hand, I took an extremely aggressive approach and forced a significant discount.

It’s easy for me to feel a sense of satisfaction about my keen negotiating skills and the discount secured. However, let’s look at this from the vendor side. Clearly, this was not an issue of overcharging my business friend. He paid list or the recommended selling price and at the time of the sale he was quite happy to do so. So selling me the car resulted in a significant loss to the vendor. Perhaps even worse, the P50K discount represented only 5 percent of the selling price. Yet after taking the wholesale cost, distribution and sales charges, this initial discount wiped out much of the profit margin on the item.

As a rider to this topic, irregular pricing does little to engender customer loyalty. A client who buys from a salesperson and subsequently learns he has "overpaid" will feel cheated and tricked. Rightly, he feels he has a right to be treated fairly especially since he is putting a lot of business to the salesperson’s company. Yet, all too often he see a new customer securing attractive pricing and discounts. Thus it should be understandable if he starts to squeeze the salesperson and threatens to take his business elsewhere.

In the past, I’ve suggested that if the discount to clients comes out of the salesperson’s commission, most if not all, would insist on charging the suggested retail price. Indeed, you won’t find the practice of discounting in established stores. Staff are clear about their obligations to charge the amount on the price tag and any retailer would be quick to deduct any losses from the staff salaries.

So when should negotiation be considered? As a strategy and behavior of last resort, no negotiation should be commenced until everything else had been completed. The customer should be clearly saying, "I want to buy your product. The only thing that is preventing me from releasing a purchase order is the price or terms. If we can come to some agreement, then we have a deal!"

Perhaps one of the most common expressions bandied around in business is "Win-Win." We all understand this to mean that both vendor and client involved in a negotiation or any other transaction will walk away as winners. It is all too easy for the salesperson to use the logic that the client is happy that he got the product at a discounted price and he is happy because he closed the sale.

However, how can the vendor or salesperson consider that he has won when he has lost margin by selling below the suggested retail price and has nothing in return?

To understand how a negotiation should be conducted, a salesperson should be asking: If I offer a discount to this client, what can he do for me in return? There are a number of things that might be offered by the vendor. Paying cash on delivery instead of using a credit card or asking for 30 days credit might offset some of the discount. He might be prepared to increase the size of his order or even provide a referral to another company who will place an order. Similarly, the salesperson, rather than offering a discount, might offer some value-added extras. Perhaps the warranty period might be extended out from one to two years or some additional consumables given at a lower cost.

In a perfect world, the negotiation that follows the selling process should result in concessions by both buyer and seller alike. These concessions should be balanced. Where discounts are offered, they should be matched with additional business or other incentives from the client. And when the vendor declines to provide a discount, perhaps some other concessions might be offered to "add value" to the purchase.

As I say, this is the ideal. The reality is that rarely will concessions match equally. But the very act of asking for them means the salesperson will lose less and achieve the "win-win" outcome discussed earlier.

Feedback terry@charteris-inc.com


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The real cost of price discounts