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BusinessColumnistsJamie Herzlich

Small Business: Discounts can be profitable

Offering a discount can be an easy way

Offering a discount can be an easy way to make a sale. Credit: iStock

Offering a discount can be an easy way to make a sale.

But often, businesses give away discounts too readily, without considering how much of a toll it takes on their bottom line.

Knowing when to offer a discount and using it strategically to derive mutual benefit can help boost profit margins, say experts.

"Don't discount just to discount unless you're getting something out of it," advises Jeff Goldberg, partner and lead sales trainer for The Entrepreneur Center in Melville, whose corporate division offers sales training and outsourced sales management.

Just because a customer asks for a better price doesn't mean you have to automatically drop your price, he notes.

"Quite often it's just a question -- can you do better or no?" says Goldberg.

Don't discount too quickly

Often, businesses remember the few people who complained about price and it clouds their judgment, explains Rafi Mohammed, author of "The 1% Windfall" (HarperBusiness; $27.99) and founder of Culture of Profit, a Cambridge, Massachusetts-based pricing strategy consulting firm.

"They're quick to discount because they just had a bad experience in the past," he notes.

But the real problem is that "salespeople can't articulate the value of their product," he says. They need to help customers understand why they should buy the company's product or service relative to the competition.

"If you're better, you can charge a premium; if you're not as good, you can charge a discount," explains Mohammed.

To be sure, offering a lower price can activate dormant customers, he notes, adding that every company should offer a "backdoor discount" with some type of hurdle (such as, the discount is only good on certain days or times), he notes. This is a way to identify customers that are price-sensitive, says Mohammed.

But there should always be a reason or purpose for discounting, says Ian Altman, a Rockville, Maryland-based speaker and adviser on sales and business strategies and co-author of "Same Side Selling" (IdeaPress Publishing; $23.95).

For instance, perhaps you have inventory that's going to be out of season. And even then you might be a bit more creative, perhaps bundling it with another item, suggests Altman. So for example, if you buy a blazer, you get a $75 blouse for $25.

This way you're not disenfranchising existing customers who bought that blouse two weeks ago at full price, he notes.

In general, though, Altman believes nearly every business can differentiate itself on something other than price. It might be better customer service or ongoing support, he says.

"The problem with competing on price is it's a race to the bottom," says Altman.

It can also impact how customers perceive you, so consider price positioning carefully, says Rich Isaac, president of Sandler Training of Hauppauge, a sales training and consulting firm.

"If you're Walmart, low-price positioning is who you are, so discounting is part of your strategy," he notes. "But if you're intentionally positioning yourself as a higher-value provider, then discounting may be counterproductive."

Look at the many variables

Also recognize that there are many variables in the equation, such as how discounting will impact profit margins, or if it will actually drive up sales volume, says Isaac.

If you do discount, do it strategically to make sure you get something of equal or greater value in return, he advises.

For instance, Goldberg used to sell his consulting time in 10-hour blocks. If a customer bought 100 hours, his hourly rate would drop 40 percent because of the longer commitment.

"If you can keep a customer longer, that's a very good thing," he says.

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