Discounting can not be dialed back.  You must align your discounting with your product value and your competitive position.  Price leakage, alone, can lead to as much as 2%-5% of top-line revenue loss year over year.  Use price fences to combat leakage.

David W. Earle stated in his book, Love is Not Enough, that “Being able to say, “No,” is a necessary ingredient in a healthy lifestyle.”

 

Earle is applying the necessity for boundaries to one’s personal life.  Boundaries are necessary for any relationship both in life and in business.  Too often we see buyer-seller relationships that are 1-sided where the buyer bleeds the seller for the highest discount possible creating price leakage.

 

My father owned a catering business in small-town South Carolina and in the catering business it is understood that higher quantity often dictates higher discounts.  What is not understood is the pricing waterfall associated with the full catering engagement – labor costs, food costs, maintenance, gas, electricity, etc.  My dad would often get requests for multi-course dinners with an overall budget.  He would always find a way to fit the budget.

 

We soon found that our clientele began talking to each other and the value of a dinner party was slightly diminished, and we were only attracting budget-conscious clientele.  He began charging by the plate. He had to change the mindset of his clients, even long-term clients.  He understood that people understand how much a plate of food cost them and what price associates with the quality of the meal. He understood that saying $25/per plate created value for his business because the client would expect a high-quality meal.  When he delivered on quality, he had no pricing issues moving forward.  He also started attracting more price averse clientele.  This simple change helped save his business.

 

Download the Discount to Margin Matrix Tool to:

 

  1. Discover if your products are being discounted appropriately
  2. Adjust your discounting rules to maximize value from the product
  3. Understand how and where products are performing against each other in accordance to their product life cycle.

     

Price Leakage Is Synonymous to Value-Leakage

 

My father had to find out the hard way that allowing price leakage de-valued his product. Your brand and your product value are worth protecting at all costs, so why do companies allow massive discounting to high-value products? They do not understand how to say “No!”

 

In the information age, buyers are sophisticated from the enterprise to SMB.  Buyers understand your fiscal year schedule and will patiently wait until the end of the quarter if your sales managers allow your sales force to increase discounts to meet their quarterly quotas. Buyers understand that discounts aren’t rolled back so they hold for the highest possible discount in an initial deal. How do you combat this?

 

Through having the appropriate price fences and to Just Say “No”! when the deal isn’t aligned to the fences.

 

The Buyer-Seller Relationship Is Just That – a Relationship

 

Looking back at the quote by Earle, it is easy to understand that you must be able to say no for a healthy relationship, friendship, or even in parenting, yet we are fearful of implementing similar practices in businesses.  In any relationship there are ebbs and flows, gives and takes, and many compromises.  Simply put, it is work, however the work is often seen as a necessary step for happiness or compliance depending on the relationship.  Children often will do as much as their parents will let them get away with.  They know the limit and will often test that limit until the parent does something to reinforce the boundary.  This is no different in business. Today’s buyers are sophisticated.  They know their limits and too often sellers yield to the buyer’s demand to simply “get the deal done”.

 

The buyer-seller relationship and journey require work to maintain a healthy working relationship. Part of that is creating price fences to prevent price leakage so that you can provide value to the customer.  Price is a direct reflection on perceived value.  In pricing, perception is reality.  If you don’t value your products how can you expect your customer to?  Not walking away from deals that do not provide value is de-valuing your product.  Product perception can be created easily, but once de-valued it will take 4 times as long to recoup.

 

Allowing Price Leakage Also Devalues Your Product

 

  1. Erodes Product Margin

     

  2. Alter’s the Product’s Perceived Value

     

  3. Mis-aligns product life cycle management

     

Here are five questions to ask yourself to determine if you may have a price leakage problem:

 

  1. Does our sales team use value-based selling methods? Are they properly enabled to prevent price leakage?

     

  2. Do our product margins and discounts align with the value that the products bring to the company?

     

  3. Do we track our buyer personas and price to them according to their willingness-to-pay?

     

  4. Are our discount approvals aligned to the corporate strategy for products?

     

  5. Does our corporate strategy allow for us to say “No” to deals?

     

Price leakage is also affected by your competitive position in your market.  You must be able to use price fences that allow for an optimized Competitive Price Position.

 

Competitive Price Positioning is the process of pricing products based on the value they create for both the end user and for your organization.  Premium products should be priced to their value as leaders in the market and commoditized products should be priced for competition.  The key here is to create a distinct differentiation in value for the different product categories.  That total value to the customer should be set so that the customer’s perceived value of the product is also high.

 

From there your organization can raise willingness-to-pay for personas the premium products by understanding and influencing its product and its customers with 3 steps:

 

  1. Understand customer needs & preferences by using surveys and customer panels.

     

  2. Understand perceptions of our performance compared to our competitors.

     

  3. Change value perceptions by aligning to the factors that customers deem as important.

     

     

Price Leakage Is a Problem That Only Gets Bigger

 

Discounting can not be dialed back.  You must align your discounting with your product value and your competitive position.  You must understand your buyer personas to maximize their willingness-to-pay.  You must mange and control your perceived value in the marketplace.  Price leakage, alone, can lead to as much as 2%-5% of top-line revenue loss year over year.  Use price fences to combat leakage.

 

Download the Discount to Margin Matrix Tool to:

 

  1. Discover if your products are being discounted appropriately
  2. Adjust your discounting rules to maximize value from the product
  3. Understand how and where products are performing against each other in accordance to their product life cycle.

     

 

Additional Resources

 

Schedule a working session at SBI’s Studio. 

 

Located in Dallas, TX, our facility offers state-of-the-art meeting rooms, lounge, full-service bar, and a studio used to tape our TV shows. SBI provides the location and facilitators, all at a compelling price point.

 

New call-to-action

ABOUT THE AUTHOR

Chris Jenkins

Beyond the numbers, there lies a story. Let’s make it a Best Seller!

Prior to joining SBI, Chris has been an IT Strategy Consultant, Business Analytics Consultant, Sales and Solutions Engineering.  At IBM, Chris delivered high-level IT analytical analysis through for major IT strategy engagements which enabled his client’s c-suite executives to make business decisions based on the KPI tracks, component business modeling, and predictive analytics that he provided in order to drive growth and stability. Chris partnered with clients to create unique features using IBM BlueMix and IBM Watson integration into high-growth and high-priority enterprise and commercial product offerings. He conceptualized and implemented new marketing tools for sales enablement around Mobility Consulting for IBM that led to a 30% increase in engagement sales in 2015. Chris managed 27 customer accounts and grew sales by 14% to $1.3M in Sales at Kyocera by crafting a strategy to enter the internal medical device market.  He also streamlined work processes and created work instruction documentation for Westinghouse Engineers that led to annual savings of $400,000 in wasted productivity.

Read full bio >