Why you should stop discounting and charge more
When you looked at that heading, did you think ‘no chance!’ Or perhaps you shouted at me; ‘what does she know?’ Certainly, if you are anything like most people in business, you might have some genuine reasons to be sceptical, like:
1. I need to give discounts to win business
2. I need money and I need it now – so even if it’s not that profitable, by discounting I do get some cash flow
3. I’ll raise my prices when I’m busier
4. I don”t know how to justify charging more
5. It’s just easier to give a discount
6. My customers can’t afford to pay more
Well, if that is you, then you need to know that, unless you are in the bargain basement discount end of the market, discounting has been shown not to work. These are the main reasons why:
1. Someone else will always discount a bit more – so before you know where you are, they have undercut you, then you need to undercut them and so on. The result? Even if you do make the sale, you have totally eroded your profit margin.
2. The people who buy from you at the low price can’t afford the full price. In other words, they will never be your most profitable customers – they will only ever buy from you when you discount.
3. You will attract customers who see the value of what you are offering at the low price, but not the high price. In other words, they are only focussed on price and cannot see the added value your quality/service/offering which, of course, is why it costs more in the first place
4. If they customers haggle over price, they are likely to haggle over everything. So there you are, operating on a small margin and they will want faster delivery, more wrapping, premium service and all for nothing. They will waste your time and you could lose out on a genuine customer while this time waster is distracting you.
5. You have to look after your profit margin. If you normally make £100 profit per item and you discount, you might only make £50 profit per item. That means you have to sell twice as many to make the same profit (in other words, work twice as hard!). Do you really want to work even harder than you do already?
6. You’re worth the full price! Most entrepreneurs and small businesses do provide great value – perhaps you make something by hand, you source the best ingredients or raw materials or you simply provide a wonderful service – well if so, you deserve to get paid for all that extra effort and attention to detail.
I hope that has convinced you somewhat. However, if discounting is counter-productive, then perhaps we should take things one stage further and increase prices. There has been a lot of research on this and, surprisingly, companies who do raise their prices consistently notice the following benefits:
1. Customers will see you differently. You will be perceived as ‘high end’ or perhaps elite. Some customers who were not aware of you will now be more interested.
2. A higher price forces you to examine your own value proposition. If you are charging more, is it worth it to your customers? How can you justify this price? This focus will help you to constantly ensure you provide value and means that you should be able to differentiate yourself from the competition.
3. Bad prospects (the ones only interested in price) will vanish, leaving you the time and space to focus on your target (i.e. profitable) customers
4. Selling at a higher price means you are more likely to have customers who understand value. Therefore, they will appreciate what you can offer and are likely to come back.
5. More profit. Will an incremental increase in effort, you can achieve bigger profit margins which, let’s face it, is probably the most important part of running a business.
So don’t be scared of price, or of what your customers will think. Be prepared to re-examine your pricing strategy and you may well find that you will prosper, just by the simple act of not discounting and charging what you are worth. How liberating would that be?
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