Discounting Madness
The economic downturn has created a crisis of confidence in organizations across the public and private sector. Most have resorted to selling primarily on price instead of value. I wonder if organizations even know what they are selling beyond discounts and rebates. Pricing is the least understood and most poorly implemented element of the marketing mix. Whenever you see an overreliance on discounts and incentives to boost sales it’s a red flag. Leading with price is a sure sign of an undifferentiated product or service.
Far too many marketing and sales organizations overuse incentives and discounts. That’s because it’s easier to sell at a lower price than work to convince customers of the value inherent in a higher price. It’s also human nature to sell at a lower price rather than accept the risk of losing a sale. The problem is that discounting behavior sends a message to consumers that the offering isn’t worth the asking price. Inevitably, customers will simply wait for a better deal. Selling on price is like a drug addiction. Once discounting behavior creeps into an organization it’s difficult to control the habit.
I learned this lesson early in my career while in a corporate pricing job. I was responsible for bringing discount requests from a large field sales organization directly to the president of the company. He reviewed every request no matter how small and I wondered why. Clearly discounting behavior was unwelcome in the sales organization. The organization learned that differentiating product value by holding the price line and accepting manageable risk was the only winning strategy. The process also provided a great window to assess field management talent for future promotions. As often as I tried to explain this to field sales managers they still spun incredible stories about how their business was at risk and if they couldn’t offer a discount, ‘all would be lost’.
I observed the same discounting behavior at many companies across multiple industries during my years as a strategy consultant. Once a discounting addiction takes hold in an organization only a significant rehabilitation effort, usually including personnel changes, can turn a downward pricing spiral around.
Even more alarming is the identical trend in the public sector. After six years in economic development at the state level and observing state, regional, and national economic development efforts across the country I am convinced that discounting behavior has become deeply imbedded. Communities across the country don’t know what they are selling and have lost leverage to employers who now have all the buying power. Companies have disaggregated their business models moving capabilities around the world like chess pieces. They force communities to bid against each other competing on price to keep or attract company investments and highly sought after jobs. Communities are treated like commodities with third-party site consultants fighting to maximize incentives and tax breaks for their clients.
The pricing food fight among states is intense and all at the taxpayer’s expense. There is no net new value created when companies move from one community to another. Economic development teams advocate for price concessions in the form of cash incentives and tax breaks to lay claim to new jobs for their community. I have watched companies extract discounts from the taxpayer simply by either moving or threatening to move their company fifteen miles across state borders. This is a terrible use of taxpayer dollars.
There are many examples of the discounting addiction that has gripped communities across the country. My favorite is the movie industry. State leaders and politicians fall over themselves to bring movie productions to their localities. It must be about having their pictures taken with the movie stars because it isn’t about the economics of the deals the movie studios cut playing states against each other. The going discount to attract movie production ranges from 30 to 40% of the total production costs in the form of tax credits that can be sold to local taxpayers. I have reviewed several of these deals and can’t begin to make economic sense out of them for anyone other than the movie studio.
It is no different at the Federal level. First, we had cash for clunkers using tax dollars to subsidize the purchase of new cars. Next up is the appliance rebate program to subsidize the purchase of new refrigerators and dish washers. This isn’t economic development. It’s selling on price. Where is new value created? How does this make our country more innovative and competitive? How can communities change the conversation from one focused on price to one focused on value?
What are we selling?
The short answer is that I don’t think we know. So we default to discounted pricing schemes. I thought we were selling American creativity, ingenuity, innovation, and value? Where’s the confidence to sell our value? Instead of investing in discounts and incentives, why not invest in the education and training of our people? Why don’t we create an economic climate that encourages entrepreneurs to start more companies? Why don’t we work together regionally to create differentiated innovation hot spots around the country? It’s time we figured out what we are selling and to sell it confidently based on value and not solely on price. Stop the discounting madness.
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You raise a very important point that every small business owner needs to take into account.
As a small business consultant I have seen this discounting mentality operating at the micro-firm level to the detriment of the small business owner. The fear of a perceived competitive pricing threat, often misplaced, is the driving force.
A few years ago I was consulting with a local (RI) family owned jewelry firm. Like many such firms, this client had a number of different related businesses going under one roof. All of these were being done on a small scale. This “farming” practice, or diversification, provided a comfortable cash flow, but resulted in poor information about the individual business operations.
One business was manufacturing stainless steel ear-ring blanks for costume jewelry manufacturers. Imported nickel plated blanks from Asia were selling at half the price my client was asking for his stainless steel blanks.
In response to the perceived pricing threat, my client developed a new process for stamping out his blanks. The process cut his production costs in half, making him competitive, he felt, with the imports.
In addition to the foreign competition, he faced competition from two domestic competitors who also made stainless steel blanks. These competitors competed by selling their products at a slight discount to my client’s price.
Federal regulations were in place to limit the use the nickel plating in ear rings because of health concerns. This was going to have an impact of the domestic use of imported blanks in domestic ear-ring manufacture.
My client used his innovation to immediately dropped his price to slightly higher than the imports, or about a 45% discount. He did this hoping to remain competitive with the imports. This also drastically undercut his domestic competition.
At the time I met the client, he was concerned because the imports had just lower their prices by half and his revenues were down. He felt he could not compete with their new pricing. What could he do?
After listening to him, I discovered that he had no strategy. He failed to see the true value of his product and the environment in which he was competing.
Based on discussions with his customers, I learned that his product was considered to be of high quality and fairly priced. His customers appreciated the price cut. According to several customers, the imports while costing 50% less per gross had quality issues. Close to 50% of the imported blanks had to be rejected for poor quality.
To the customer, the real price for imports was about the same as what my client was asking for a better quality product. The real problem they mentioned was my client’s lack of capacity to fill orders in the volume and time the customer needed. This, more than price, drove customers to buy imports or his domestic competitors’ product.
The client failed to understand who and what his competition was. He failed to understand the value of his product to the customer. Instead, he responded to a perceived pricing threat with a discount pricing strategy before he first reviewed his original value proposition. As a result, he lost all of the advantages his innovative process created. He had the opportunity for windfall profits and to make inroads into his domestic competitors’ market, instead he chose to lowered prices too quickly. All the benefits of his innovation went to his customers in the form of a substantial discount without resolving his problem.
It is critical, especially in times like these, to re-examine and confirm your value proposition before taking the discount road. You can always ask for less, but it is very hard to ask for more once you lower your price.