Should You Discount Your Selling Price?

I hear this question frequently from my clients – small- to medium-sized businesses (SMBs) in the B2B space – that are looking to grow and increase revenue. Let’s start with what could be the origin of this philosophy.

The old business adage that “I’ll make it up with volume” can be traced back to November 1933:

Watching world agriculture fall deeper and deeper into the troubles of overproduction, one is reminded of the lunch stand man, selling fat hamburgers for five cents, which was less than cost; and who replied to an inquirer, “I’ll make it up on volume.” The Oregonian (Portland, OR)

Or possibly even further back, to February 1833:

Perhaps they are like the Irish mercer, who, having assured a lady customer that the silk he desired to dispose of to her actually cost him more per yard than he charged for it, was asked how he then could afford to sell it so low. “Ah, madam, he replied, we depend for our profit on selling a large quantity.” Evening Post (New York, NY)

This is actually a bad business joke that far too many owners, sales leaders, and sales personnel still believe.

Let’s Look at the Numbers

The following invalidates the assumption that you can discount your price and hope to make up the lost profit with volume.

Increasing Price and Maintaining Profit with Lost Sales

First, let’s assume that you currently maintain a gross margin (profit) of 40% and you decide to discount your sales price by 10%. You would have to increase your total sales by 33% to just maintain the profit you would have had prior to the discount. Is it reasonable to believe that you can increase sales by 33% with a 10% discount? Doubtful.

Next, let’s assume that you currently maintain a gross margin (profit) of 20% and you decide to discount your sales price by 4%. You would have to increase your total sales by 25% to just maintain the profit you would have had prior to the discount. Is it reasonable to believe that you can increase sales by 25% with a 4% discount? Doubtful.

Finally, let’s assume that you currently maintain a gross margin (profit) of 60% and you decide to discount your sales price by 20%. You would have to increase your total sales by 50% to just maintain the profit you would have had prior to the discount. Is it reasonable to believe that you can increase sales by 50% with a 20% discount? Doubtful.

To be fair, there are times when it does make sense to price a product or service at or below cost: (1) when entering a new market; (2) attempting to eliminate a competitor; (3) in order to maintain a customer until they can be replaced; or (4) as a “loss leader” to increase sales of additional products or services. However, these are rare exceptions to general business practices.

The Bottom Line

It’s about PROFIT … not REVENUE! You generally cannot make up for lost profit by discounting your price and then “hoping” to make it up with increased sales volume. The next time your salesperson or customer asks for a discount, ask yourself this question: “Can we really sell that much more if we discount that much?”

Look for my next blog where I will discuss why you should actually RAISE your prices.

Want to learn more about sales consulting and sales strategy? Read about various sales topics in our sales consulting blog.