To discount or not to discount, that is the question. When should you do it? How often should you do it? Who should be in charge of it? What are the price of your products set by? Are they set by what the market will bear? (Bad idea) Are they set by a cost + model? (Better, but not ideal by any means) Do you even know? How should they be set? The answers to these questions are critical to the success and profitability of your business.
Product pricing is one of the most strategic elements of the marketing mix in your entire business arsenal. You can’t afford to get it wrong. In simplified terms, you need to first decide what kind of value proposition you want your business to model. Do you want to run a high-volume, low-margin model? Do you want to employ a high-value, high margin model? Most businesses in our industry are somewhere in between, if they have even thought about it. So there you are – think about it!
If you wish your company to be seen as a professional organization that operates above the run-of-the-mill contractor, with knowledgeable service and installation people, professional looking vehicles etc., then you must price for it. First, you must know your costs. Then, once you have a firm idea in mind of what you want your business to look like in the eyes of the consumer, determine what level of profitability matches that look. What about local market prices for your products and services, where do they come in? It is important to know what your competitors charge in the local market, but that should only be a measure of where they stand versus the value your organization brings to the consumer. The problems come when your prices are either too high for the value you offer – or too low. Anyone in your organization who comes into contact with a consumer simply must know and buy into your organization’s value proposition. They must be convinced that what they are asking the consumer to pay is worth it. If they have a problem asking the consumer for a fair price relative to value received, you have the wrong employee.
What about discounting, when is it appropriate? Do you know what percentage of your company’s sales are discounted? If not, that is a good place to start. Excessive discounting can be like a disease that slowly but insidiously eats away at the value of your company from within. Your sales and service people need to have clearly identified guidelines as to when they can and cannot discount. If they are paid a commission, it should be lessened if they close the sale by discounting it. It is important that they personally understand the connection between discounting and profitability, both personal or organizational profitability. Excessive discounting, either in the level of discount offered or the frequency of how often it is done will leave your customer confused and worse. The worse part potentially manifests itself in consumer mistrust of your organization. That makes it harder the next time you try to convince the consumer of the value you are providing with your organization, product and service. In addition, by discounting you’re training the consumer to ask for a discount again next time. Think Sirius Satellite Radio.
What is a better path of showing value? Consider the following.
- Take the time to understand your customers needs and desires
- Clearly present a solution that you believe satisfies these needs and desires
- Make sure to link the benefits of your product and service to your customers needs and desires
If you must discount, make sure you commensurately reduce the value of the product or service offering. (offer a lower SEER rated air conditioner for example) By doing that, you are maintaining the integrity of the value proposition and not confusing the customer.