By Paul Reilly
A recent article in Inc. Magazine suggested that “discounting is for dummies.” The article even mentions Warren Buffett’s philosophy on pricing. Although Buffett is a hands-off executive with his company, he is heavily involved as it relates to pricing. Buffett even suggests, when facing tough competitive pressure, consider raising the price.
You may be thinking, “That’s easy for Buffett to say. He’s not dealing with the customer or competitive pressure I’m experiencing.” But that is the very reason Buffett should control pricing. When you are too close to the pressure, you are more likely to discount—especially in tough times.
Why is it that during tough times, discounting is thought to be a prudent strategy? Salespeople often think, “When business is down, let’s discount to make up ground.” Discounting rarely works to spur long-term profitability. Discounting to grow your business is like poking a hole in a sinking ship so that the water has a way to exit. Rather than staying afloat, you sink quicker.
Before you discount, consider the long-term impact. Here are a few considerations:
Lowering your price sets a discounting precedent. Today’s exception is tomorrow’s expectation. Discounting establishes a new pricing benchmark having serious implications for future profits. Conversely, holding the line on your price also sets a precedent. If you hold the line once, then twice, the buyer is less likely to ask a third time. It’s like a child asking for candy, refusing their request deters them from continuous badgering (most of the time).
Discounting devalues your solution. In the absence of any other information, price is the greatest indicator of quality and performance. We like to simplify decision making. Our immediate thought is that if something costs more, it’s worth more. By discounting, you are effectively saying your solution is worth less. The goal is to increase the perceived value of your solution.
Rather than discounting your price, look for opportunities to increase value. When the customer asks for a discount, respond by saying, “Mr. Customer, it appears there is a discrepancy between the value of our solution and the price you are willing to pay. How can we add more value to this solution to make it seem more equitable?”
Be sure you are passing along price increases to your customers. As your costs increase, so should your price. Stop taking it on the chin. During this inflationary period, every profit dollar counts. An inflationary period is an ideal time to raise the price. Eating inflationary costs is effectively discounting.
Think twice before you discount your solution. Every dollar you discount is pure profit lost. Consider the precedent you are setting. Rather than lowering the price, increase the total value of your solution. During these inflationary times, most companies are already raising prices. In that sense, it’s okay to follow the crowd. Don’t be the one left eating inflationary costs for your customers. You could end up starving.