In competitive markets, price focused customers push for discounts. As a sales Professional your job is to close deals, but how much extra do you really need to sell to compensate lost gross margin when discounting?
The motivation for any profit driven business is net value. Net value is the amount of cash you have in your pocket after a sale is closed* – when all costs are removed. It is important to understand the impact a price reduction will have on your gross margin.
Let us look at an example.
Your company sells a product for $2.000. The total cost of the product, including everything, is $1.200. This gives a gross margin of $800 per sold unit (40%).
A customer is buying 80 units; a deal value of $160.000 with cost of $96.000 ($64.000 gross margin). You have given the customer 2.5% volume discount ($50 per unit), but the purchaser is persistent and you are eager to close the deal to meet your monthly target. He wants another 2.5% off. You cave in at 1.5% extra ($30 per unit) and the total discount is now 4% ($80 per unit) and the total deal is at $153.600.
Your total possible gross margin was initially $64.000. But with 4% discount it has been reduced to $57.600. And the 4% discount equals a 10% loss of your gross margin.
You need to sell more
To compensate for the loss, you have to sell more units. And, being a good sales professional, you convince the customer to buy more since you dropped the price with 4%.
How many more units do you need to sell at the 4% discount level, to lift your total gross margin back up to $64.000?
With 4% discount, you gave away 10% of your gross margin. You need an additional $6.400, and your unit margin has been reduced from $800 to $720! You need to sell 9 more units at 4% discount ($6.400/$720 = 8.89) to get the same gross margin as you get by selling 80 units with no discount… 11.25% more units!
That is a lot!
Discounting is not something you should do easily… In the next coming blog posts I will cover topics related to avoiding discounts – and that is of course related to value proposition, buying motivation and solution selling!
Now go sell!
PS! I’ve already written a spot on the “So What?” of value propositions.
* remember that coffee is for closers only! Enjoy a video clip from the movie Glengarry Glen Ross.