Post by moncler outlet on Dec 29, 2011 7:21:02 GMT -5
If you are in a sales situation, how do you deal with sales objections where your price is too high? Do you offer to lower the price or to give a discount on the regular price? All too often, it seems that the easiest way to clinch a deal is to drop our price.
There is no doubt that discounting your price could provide you with a quick win and, even as a policy, terms like 10% off for cash payments can occasionally improve overall sales. However, without careful planning, discounting can severely impact on your business’ profitability.
Apart from discounting, there are many ways to handle price objections. But for brevity of this article, we will look at discounting through the bean counter’s eyes – the finances.
Your accountant will be quick to point out the obvious effect of discounting: a discount is a cost that comes directly off of bottom line profits. But there is another effect of discounting that is often overlooked. Have you considered, in your particular business, what extra effort is required to recover your “lost” profits? You may have more sales and, sometimes even a higher turnover, but do you know exactly how your discount affects the profitability of your business?
A brief example will demonstrate this: WidgeCo makes and sells widgets, which normally retail at $100 each. 500 widgets are sold each month, giving WidgeCo a monthly moncler coats sale womens turnover of $50 000. The direct cost of producing and selling each widget is $60, which is made up of raw materials, sales commissions, moncler down coat 2010 transport etc. These variable costs are aggregated each month Moncler into a cost of sales figure of $30 000. In addition to cost of sales, WidgeCo spends $10 000 on fixed costs (FC) such as rent and salaries.
We now know that WidgeCo’s gross profit percentage (GPP) for its widgets is 40%. WidgeCo’s breakeven (BE) turnover is $25 000, calculated by the formula BE = FC / GPP. WidgeCo is therefore profitable, with net profit standing at $10 000 and net profitability (NPP) at 20%.
Now what say WidgeCo decides to run a promotion, offering a 10% discount for Moncler one month. Turnover will drop by $5 000, but because the same volume of widgets is being produced, cost of sales remains $30 000. GP is therefore $15 000 and NP is reduced by the same amount to $5 000.
This is the crux of the danger of discounting: for WidgeCo to recover the cost of the discount, it will have to increase turnover by more than the discount value. In this example, the required increase in sales volume is one third, a large increase indeed! This would produce a turnover of $60 000, a cost of sales figure of $40 000 and a GP of $10 000 , which will then bring net profit back to $5 000.
Can you imagine trying to sell an extra third of your product or service? This simple model doesn’t even cater for the likely increase in your fixed costs caused by having to increase production capacity to cope with such a jump in volumes!
What if the discount rate is higher or margins (GP and NP) are smaller? Picture the effect on profitability and production and capacity requirements of a 15% discount! If your margins are smaller than WidgeCo's, do you know how much more you must sell to recover the cost of even a 5% discount?
The next time a customer raises a sales objection on your pricing, how readily will you cut your price just to close the deal? Or will you have done your homework before hand and built negotiating space into your price?