Question: How much discounting do you consider now during the Coronavirus environment and/or shoulder season to drive up revenue instead of having a revenue valley to fill up later?
Weldon Long; EGIA faculty member and New York Times Bestselling Author:
Well you know it's kind of funny and Drew and I had a very similar philosophy on this. I've heard him say it and I’ve said it a thousand times. Ideally, in a perfect world, when we’re offering specials, we’re being special. But listen, price discounts are a part of the game. People have an expectation for some negotiation on different things.
So, there's only two things I take into consideration when I start talking about discounts.
Number one, is the discount built into your retail pricing - what I called retail pricing strategy. If I've got my pricing where I'm at a 50% gross margin - or whatever your target is - then we typically will add about 10%-12% on top of that for what I call my retail price. That is basically negotiating room, which we can use to offer additional discounts or throw in a free “this or that.”
That’s going to help if you get that one person that just has to have a $5 discount so they feel like they won the game with you.
When I sell air conditioners, I sell air conditioners the same way I sell boats and cars. I always ask more for them than I'm willing to take. If I’ve got a boat I'm selling on eBay and I need $20 grand for it, I'm probably going to ask $25 grand. If I’ve got a car, I’m going to ask a little bit more for it. Or even real estate, I’m going to ask a little bit more for it.
To me, that's just kind of a natural part of the culture. People expect some give-and-take and some negotiation. So, that's the first consideration. Is it built in?
The other thing is, where are you in relation to your gross margin?
I know a guy for example a client who had a 25% markup above a 50% gross margin. So, they would have 50% gross margin and then they would divide by 0.75 to mark it up another 25%. Then that was all negotiating room. That seemed like quite a bit to me but it works for them. It was all negotiating room.
So, whatever that number is his fine but the bottom line is, what is the gross margin when it's all said and done? As long as your gross margin hits your target - whether that’s 45% of 47% - then you're fine with discounts.
Now, if you have your goods and services priced at one price, like this is what we need to get, this is our 47% gross margin, then obviously every dollar you discount from that is going to cause problems for you.
It's all part of a global strategy. You can’t look at it in a vacuum, like how much should I discount. It all depends on your pricing strategy, your marketing strategy, and your sales philosophy. It depends on how you’re set up and what you’ve built into your pricing.
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