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Saturday, October 25, 2008

Discount, nah, "I raised my prices"

Someone started a thread on asking whether it makes sense to offer discounts to draw business during the recession. I really enjoyed this response from "Grumpy", (Thomas Kral, Reliable American, Inc.) in Chicago:

I increased my markups. Smart business dictates when volume goes down markup goes up to achieve the same profit. We are doing less jobs but making twice as much profit per job than we were doing last year, therefore we are doing a lot better financially this year.

Be the black sheep, and do the opposite of what everyone else is doing. There are guys out there pricing like they are going out of business, and that's because they are. I have seen quite a few competitors drop off of various directories, with new low priced competitors to take their place. Sure they are "busy" but are they making money?

What's the point in working for practice?

Do I offer discounts? Sure I run "sales" from time to time. I will sometimes offer $100 if the job site is a high traffic site and I can leave my signs up for 30 days. I am even have coupons on my website, but to be truthful very seldom am I ever taken up on these discounts coupons or offers. Another point that must be made, even in these trying economic times (if you pay attention to the media) very few people are asking me for discounts. Of the last 15 sales I have made not a single person has asked me for a discount.

Why? Because I built the value in my sale. Because I am actually offering more than most of my competitors. Because there are dozens of guys charging more and hundreds charging less, but very few actually doing a better job. Because I take the time to meet with the customer and explain all that in very minute detail if necessary. Because I know more technically than most of my competing salesmen. Because I treat my customers like people not like dollars. Because in most cases people respect me and begin to trust me after they have met me. I started the year with the same fear as everyone else, then I had a tragic death in my company (heart attack unrelated to any work activity). It was bad there for awhile, but when I RAISED my pricing, things started to click.

I discovered that the people who were hiring us weren't hiring us because of our price. I already knew that but forgot it because I was paying too much attention to the media Bull kaka that the sky is falling and we are in the midst of the next great depression... No I realized the people were buying ME not buying my price. I decided that the people would hire ME if I added $500 to the price, and I was right, so I added another $500 to the price and I was still right... and you know what? Our volume didn't go down, not one bit. Our volume has been lower than it was all last year since the start of the year, but our volume has held steady all year even after I raised my prices.

I really believe when you play pricing games you'll get price shoppers. Have you tried raising your prices before you lower them?
Other posters in the thread offer differing perceptions on the issue. Discounting may be part of the 'game' in marketing in some areas of the industry, and may be practical or responsible in others. The question you need to ask yourself is whether you really are increasing your volumes and profits by lowering your prices (honestly) or just playing around with 'discounts' as a gimmick (IE, raising your prices to 'lower' them -- as if the clients don't know the difference.)

In our own business, to get started, I began using a "net" and "gross" pricing policy for advertising. In the early days, before we built up trade credit, we offered the net rate for anyone who prepaid their ads and the gross for anyone who wanted to be billed. The net rate savings is 25 per cent. The system brought in cash.

Today, our discount is available if invoices are settled within 15 days upon publication. Now, our sales team and accounts collection person know not to be forceful or arrogant in enforcing the 'net' discount -- if you pay a little late, you still get the savings. But some people are late, and pay the extra 25 per cent. About a year ago, we analyzed our bad debt levels and discovered that the few advertisers who don't pay at all are almost totally offset by the advertisers who pay the 25 per cent net rate. In other words, because of the net and gross system, we don't have to budget for bad debt. (The Gross rate also solves the problem of advertising agencies requesting commissions. They can have their standard 15 per cent commission if we can bill at Gross.)

Discounts, then, have a place in the picture; just make sure there is a reasonable trade off and value proposition to justify them; not a desperate strategy to bring business in the door. I like Grumpy's attitude and values here.

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