THE TRUE COST OF DISCOUNTING

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EPISODE 42

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ABOUT THE SHOW

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A commonly used strategy to increase the sales and income in business is to offer a discount to entice more customers to buy. But discounting can work out more expensive than you might first think. Episode 42 explores the true cost of discounting in your business and how a 10% discount can cost you a lot more than 10% profit on your business bottom line. Tune in with Jason Skinner right here!

WHAT YOU'LL LEARN

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EPISODE TRANSCRIPT

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Jason: You’re in episode 42 of the Business Made Easy Podcast. How we doing, Mia?
Mia: Fantastic. Thanks, Jason. [music playing] You’re on the Business Made Easy Podcast.
Where we made business easy. Here’s your host, Jason Skinner.
Jason: G’day, g’day and welcome to the Business Made Easy Podcast where we made business
easy. Jason Skinner, host to you for another episode. Episode number 42, coming to you this
week which is uh incredible really because when I started this podcast uh oh back in September
of last year. I could never have dreamed of getting to episode 42. So it seems a little bit funny to
be saying that number, but anyway, we are and it’s great. I’m glad to be here with you, glad
you’re here with me as well.
If you’re new to the show, welcome. I’m glad you’re here. Uh don’t forget to hit the subscribe
button and if you enjoy the show, please leave an honest review on iTunes because it helps us
get found on iTunes and helps more business owners and helps the show to uh to grow
and–and keep delivering viable content to you each week. So and that’s what–that’s what
we’re all about and the today is no different. I’m going to do a solo episode today. (1:10) So it’s
just me today, but I’ve got–we’re going to talk about a particular topic that doesn’t get
discussed. Actually, when I–when I was putting uh notes together for the show, I actually
start–I did a bit of research, just background research just to see what information and content
was out there on this topic that we’re going to talk about today and for something that is done
so often in business and I will tell you what it is in a sec. Uhm–something is done so often in
business.
There really wasn’t a lot of content out there on this so I thought it would be a great uh great
episode to bring you to be able to help you to–uhm–to save you some money actually because
we’re going to be talking about the area of discounting (1:48) and it’s it’s one of my
pet–uhm–hates I guess when I’m advising businesses. I really don’t like–uhm–my customers
and clients to–to be offering discounts. So I’m going to get through why I have that opinion
because it’s very common and it’s a very easy strategy as you know to, particularly if you’re
starting out for instance. Your very first inclination to get new business in the door or
customers in the door is to offer an inducement or discount by lowering your price in a hope
that the customer sees value in–in what it is that you’re providing, but at a discounted price.
So–so this is fear of missing out effectively and that’s what discounting really works on is–is
fear in a customer’s mind of missing out. So they uh so they jump in and buy. So that give me
wrong that discounting can be a good thing. Uhm–there are many, many times where
discounting might be inappropriate strategy, but I want to get through today with you just the
practicalities of discounting and what you’re actually doing when you’re discounting because I
think what happens is too many people uh in business just use that as they go to
position–uhm–to attract new customers into their business or to–to make more sales and I
think it’s a lot better strategies which we’re going to talk about and I’m going to share with you
today that uhm can make you more money and, actually uhm really bolster your bottomline
profit. (3:17) That’s what it’s about uhm it’s no point and I’ve always been a believer. This is no
point discounting uh the price. You’re discounting your price uhm to make more sales but
you’re actually uh damaging your bottom line profit and and that’s not what we want to do
because uhm at the end of the day, it’s not the sales that we make, it’s the actual money that’s
left in the bank account that is the critical indicator of success in business and we want–we
want money in the bank so that’s that’s that’s the way I–I–I approach discounting now. But,
one of the things I do want to talk about with discounting is that there’s this misconception that
if I offer a ten percent discount. I’ve only got to make ten percent uh more in sales to to cover
that short for and as we get through today’s uh episode, you’ll learn by the end of it that
the–that could not be further from the truth. [chuckles] So you’ll uh be quite actually when you
go through the mass involved with discounting. It’d be quite stagged and I don’t think you’ll
ever offer a discount again once you know what is truly costing your business.
But let’s look the philosophy behind discount. What’s actually happening when we’re
discounting our prices. As I said earlier, the the –in the customer’s mind, they they
getting–uhm–I guess it’s a fear of missing out as I said. It’s like–uhm–if I had–if I had–because
normally discounts are–uhm–when a business discounts their their product sale they also
write uh for a limited time thirty percent off or uh for this week only twenty percent off. (4:57)
So what–what’s actually happening there is in–is this concept of uhm missing out in a
customer’s mind? Okay, I’ll grab it. I wasn’t going to get it this week but I will get it this week
because it’s got thirty percent off and the time for this week. So I will miss out on that–on that
discount. So that’s one–one of the reasons why uh discounting uh appears to work. The
other–uhm–the other reason is that–a–is this perception of just–a–cheaper value like it’s
just–uhm–I can buy it from–uhm–XY shop down the road for 100 dollars so I can buy it here
today just for this week for fifty dollars. So you know, there’s this–uhm–perception of value
and that’s where I have a problem with–with discounting because if you’re going to
discounting and you–you–just to say you’re–uhm–you’ve got a competitor that’s selling the
same thing as you.
They see that you’re selling it for twenty percent off this week then they drop it but they going
to do it for thirty percent off and you can’t get into a discounting or where this–where is a
fairly competitive market and that’s is an absolute raise to the bottom because when you
discount–if you are discounting uh your products and services, you are actually devaluing
those–you’re saying to the customer, “Hey, this are normally this, but you know, they
really–uhm–you can have them for this.” You know, you’re actually taking value away from
that product or service and it’s–it doesn’t matter what you’re selling. It could be just uhm your
own personal services, you know? Uhm–you might charge two hundred dollars an hour for a
particular service but I’ll give you a discount this week if–if–you know? Fifty dollars off so it’s
twenty hundred and fifty dollars. So all of the sudden now that hour that you would normally
value at a higher rate and the customer’s mind they’ve got a new–a new value
level–uhm–because they–they see uh I guess the–uhm–it’s that last price I guess that last
figure in their mind that–that’s what they–(7:02) they’re remembering and when you go and
subsequently want to put your prices up, they’re they’re thinking, you know, their mind sets in
a hundred and fifty dollars and–and–you know, you really want to try and get it back up to two
hundred dollars. So rather than so so discounting sort of taking away value. If you think it that
way, it’s–when you drop something down in price, you’re taking away to see value in that–in
that item.
What I prefer to do is to add value to the transaction. So bring value to the customer and there
have been various studies down on–down on this and there was one–uhm–team of
researchers in it was University of Minnesota around in uhm Carlson School of Management
and what these researchers did is that they had two groups of people. Group A, uhm they
offered them uhm coffee beans and they could buy–if they bought the coffee beans they would
get thirty-three percent more uh when they purchase the coffee beans at the normal price but
they would get a bonus uh thirty-three percent extra coffee beans with their purchase.
Group B, they were offered a thirty-three percent discount and uh if they bought the coffee
beans, they would just–just normal uhm the normal quantity they would get a thirty-three
percent discount–thirty-three percent discount and what they actually found was that group
A, more people in group A, took up the offer of the thirty-three percent extra as opposed to
group B, uh that were offered the thirty-three percent discount. (8:35) The fact that the–the
fact this though when you do the Math, the thirty-three percent discount was actually better
valued and what this tells us is that it’s the perception in the customer’s mind of–of value.
What value represents that customer and the problem with discounting is–uhm–it
doesn’t–for–for what is uh the study proved as well, it it doesn’t–uhm–a quite to the same as
giving something extra with the transaction.
So I always encourage you to build value in the transaction rather than tight value out. When
you discounting, you’re taking value out. When you’re adding value, your–same–same–same
price but you’re adding to the transaction and there’s lot of ways you can do this. Uh
there’s–there’s ways that you can do it with–uhm– low-cost type items. So for instance, you
might have uh something that’s very low cost for you to buy or or to to make but you uh has a
high perceived value to the customer and–okay, just an example–uhm–if you were to go into a
cafe and you ordered a coffee–uhm–now this coffee shop is all over the place. There there a
hundred dozen, you go in, you order a coffee, you get a coffee. There’s not–there’s
no–uhm–no problem there, but I was recently–at–a coffee shop uh in France actually and
they brought out a–uhm–small meringue with the coffee–uhm–totally free. (10:10) I don’t
think it would cost a much to make the meringue but basically, the perceived value of that
coffee that I was having in that shop is a lot different to the coffee shop that I went to down the
road which just had the coffee. So, you know–they didn’t have to give me a discount. They
didn’t have to but basically, they give you something of perceived value to the customer but
makes that transaction uh I guess a lot more valuable as opposed to–to just to scanning. So I
hope that–I hope that makes sense to you. The other big problem with discounting is that
when you discount–let’s say for instance you discounted ten percent. People think you’re not
gonna get ten percent of uh increase sales and you–and you’ve–you know, you back to to
square one and it doesn’t work that way. Let’s just say for instance I’ve got uh an object here.
I’ve got uh a glass bottle and it’s worth–uhm–I can buy that bottle for sixty dollars. Uhm–if I–it
cost me sixty dollars to buy the bottle and I can sell it to–uhm–for a retail price of a hundred
dollars, then I’ll make forty dollars profit on that bottle. It’s a pretty good bottle. [chuckles]
So I guess we’ll go through that example. I’ve got I’ve got a bottle. I bought–I bought all my
supply for sixty dollars and I sell it to my customers it for a retail price of a hundred dollars. So I
make forty dollars and–and that’s a forty percent margin on my purchase which is pretty
reasonable.(11:53) If I offer a ten percent discount to people who want to buy that bottle and I
come into the shop today and if you buy it today, I will going to give you a ten percent discount.
That means now that where I normally get a hundred dollars for the bottle, I’m only now
getting ninety dollars and the problem is I still have to pay sixty dollars for the item. So my
gross profit margin or my gross profit on that transaction is no longer forty dollars–uhm–you
know, because the purchase price doesn’t drop in accordance with the–with the sale price. So
I’m now buying it for sixty, selling it for ninety. I’m only making thirty dollars instead of forty
dollars previously.
So I have it–I’ve taken a twenty-five percent drop in my bottom line gross profit even though I
just gave ten percent discount. I’ve actually taken a twenty-five percent drop in my bottom line
profit and as I said to you before and this is something I really, really trying drum into into my
class. It’s the money that drops out of the bottom that is important. Not the–not the sales
figure. You can–you can make a million dollars at–in sales and only be left with a hundred
dollars at the end of the day. I’d rather business that was turning over–you know, a thousand
dollars and uhm putting nine hundred dollars in my bank rather than–you know, uh only ten
dollars so were one hundred dollars.
So this–that’s a really, really important–uhm–point to make a bad discounting is that it is a
race to the bottom so you–what I’ve done for you, to help you–uhm–if you did offer discounts
in your business. Well, you are looking at–uhm–I guess offering discounts is a table that will
show you uh depending on whatever your margin is. (13:43) If I discount by ten percent or
whatever discount factor you want to use then this is the percentage increase in sales that I
need to make just to be back to square one. So I’ll I’ll take you through a little bit of an example.
So let’s just say for instance, with my example before–uhm–when I was–when I bought the
bottle when I I uhm selling the bottle for a hundred dollars and I had a gross margin of forty
percent–uhm–and I offered ten percent discount for the day. Effectively, when you look at this
table. I have to make thirty-three percent more sales just to be back to square one.
So this table is a bit of a matrix. You’ll be able to work it out–uhm–I’ll I’ll put it over in the–in
the show notes and you can–uhm–download it. If you go to
businessmadeeasypodcast.com/episode42 and–uhm–you’ll see in the show notes there, there
will be a link to download this table, but it’s a really useful table to show you exactly the
increase in sales you need to make just to be back to–to square one–uhm–if you’re going to
offer discount. It ranges in–I’ve got various discount levels down the side. You’ll be able–you’ll
see–if you need a hand working at your margin, your gross profit margin or or you wanted to
talk about any of these these strategies and numbers, just feel free to drop me a line on at
[email protected] and I can help you through–uhm–working–working
this out but it is a really, really useful table because–yeah, don’t–don’t fall into the trap
of–uhm–thinking–yeah, ten percent discount I’m gonna go to get ten percent sales. It does not
work that way. (15:32)
So–uhm, I don’t want you to fall into that trap because you’re costing yourself lots and lots of
money and I don’t want that for you. I want you to make money. So–uhm–so the–yeah.
Alrighty so that’s discounting–uhm–it is a–it is a–as I said–to me it’s a race to the bottom.
It’s–it’s–it’s taking value from the transaction and not adding value to the transaction and we
want–there so many things you can do–uhm–for not discounting. Like I mean like I said, with
the coffee shops uhm and the small uh cake dessert thing that that meringue that they uh
provided me with my coffee. It creates a wow factor and it creates–you know guess a way back
in my coffee each day while I was in France. I went back to that same shop because the same
guy gave me the same great value and–and uhm every day.
So, you know. There’s a lot more to be said for adding value to the transaction and there so
many ways that you can you can do this–uhm–things that compliment–uhm–think of things
that compliment whatever it is that uhm you’re selling to the customer. You know–uhm–in my
example with the–uhm–with the bottle for a hundred dollars instead of doing the discount of
ten percent maybe I could have provided a free lid for the bottle. Uhm you know, you got to sit
down and brainstorm these ideas but think of ways that you can–uhm–add value to
transactions, uh at low cost to you but high perceived value to your customer. That’s I guess the
nature of of what we’re talking about here. So I repeat that again, it’s low cost to you, high
perceive value to the customer and just remember that it’s perception–uhm–in marketing and
business too. A lot of–a lot of the times, you know the–the the the discounting examples of a
classic one, you know you think–you think thirty-three percent uh discount would be better uh
than thirty–three percent more but not in that–not in the customer’s mind.(17:34)
So there we go. Discounting uh try to avoid that if you can. There are plenty of other ways to uh
to attract customers to your business. Uhm–that’s all I had time for this week. If you do need a
hand with uh working at your discounting strategy or or–uhm–working out what discounting
is actually costing your business, by all means, drop me a line to
[email protected] uh if you’re not a member of our Facebook group. They
are a free Facebook community. Feel free to jump over there. Uhm–if you go to
businessmadeeasypodcast.com/community and–uhm–join the Facebook group over there. I
will be over there to welcome you uhm and introduce you to everybody and there’s a great
group of entrepreneurs over there. They’re all talking about things like discounting and uh
helping each other and helping people–helping each other with strategies and by self. Check
that out as well but that’s all I had time for this week. Great to talk to you again. Thank you so
much for joining me again on this episode number 42. I’m glad you’re here and–uhm–until next
week. Here here’s to your success. Take us out now.
Mia: [music playing] You’re still listening to the Business Made Easy Podcast where we made
business easy.

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