SPASigma was featured in a recent The Distributor Channel article, “Discounting based on Quantity?”, which discusses the power of effective price negotiations and why distributors must avoid giving “unearned” discounts.
Excerpts of the article follow.
“For many folks the idea of “locking in” business by offering up a special discount seems to make sense when future potential is involved.”
Here’s how it works. Acme Manufacturing has yet to purchase your new product but based on your knowledge of the Acme’s size and an intuition that Acme could buy lots of your product, you provide a discount.
“Our analysis of many first time sales situations, indicates a couple of key points:”
First, the discounts are provided unilaterally, with no probing of the customer’s current purchase price. What’s worse, we see this tactic used with new, emerging technologies and products never before introduced to the customer. Sometimes, the seller offhandedly informs the customer, “The normal price for this product is $1,000, but I am going to knock off a hundred dollars so your ‘special price’ will be $900.” Other times, the seller just provides a discount without even mentioning the deal.
Second, sellers provide these special deals without taking time to gather significant information from the customer on the value created by the product. Many times sellers base their need to discount on information provided about a solution that didn’t really work; assuming something that didn’t work can even be called a solution.
“There are three points sellers must understand…”
- Customers don’t have a true appreciation for discounts they see as “unearned.” According to research cited by negotiation expert Tony Perzow of SPASigma, potential customers see no real value in discounts which do not require something in return on their part. What might be a better approach? A discount which is tied to a long term commitment, a discount contingent upon placing a multi-piece order or a discount involving purchasing associated products.
- Once the price level has been set, it is very difficult to raise the price. Once a price is set, there is little opportunity to raise the price if the customer doesn’t meet your large order criteria; and this happens quite frequently. Further, a discount provided up-front minimizes the opportunity to profitably provide added features, services or even a deeper discount if the customer does hold the key to big order potential.
- Most sellers fail to understand the true cost of quantity discounting. For example, in the world of distribution, a gross margin of 25 percent is common. Assuming there are no offsetting cost reductions such as order processing, shipping charges or discounts from your supplier, the math is relatively straight forward. Using a 25 percent gross margin and a discount of 10 percent for the sake of easy math, we must sell something like 66 percent more product just to break even on gross margin.
Click here to read the complete article.
Date: June 9-10, 2016
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