Going Home Tired and Hungry
#1 Price Leverage, Part 3
In the last post, I talked about the leverage of price discounts. I’d like to dive deeper into the danger of this. One of the most common myths I hear from sales teams regarding discounting is that they will “make it up in volume.” There are two important things to consider when you hear this oft-repeated tale:
- Pull out your calculator. Calculate the impact on profitability of X% price discount and Y% volume change. What I see over and over again is that the increased volume doesn’t justify the requested discount. For our sample company from the last two posts, a 5% discount to gain 10% in volume delivers 25% less profit. Gaining volume and making less money means going home tired AND hungry. Don’t do that.
- Sales teams notoriously overestimate the volume they will gain at discounted prices. (That’s because sales teams and other internal price setters overestimate price sensitivity. More on that another day.) If you decide to go forward with a discount to gain volume, measure the impact. How is your sales team’s say/do ratio? If it’s not so hot, use that information to combat future requests for discounts.
(This is the third of several blog posts that dive deeper into strategic pricing tips posted on 8/14/14.)