Say your organisation needs 40.0% gross profit margin to operate. Imagine you want to run a 10 percent discount to push through some deals. Do you know how much you’d need to increase your sales to make up for the discounting? A whopping 33.3%. In other words, you have to increase your sales revenue by one third to maintain the same 40.0% gross margin that you had before.

The question you need to ask yourself is “Why would you want to work 33.3% harder for nothing?”

Here’s another example that underscores the enormous impact discounting has on a company’s bottom line: If a R 10 million organisation on 40.0% margin typically foregoes 20.0% through discounts, it should be doing R 12 million. And 40.0% of that missing R 12 million is around R 4 million, which means the company is losing about R 4 million in net profit through its discounting practices.

But how do you reverse that trend, particularly if the sales strategy has long relied on discounts to close sales? Here are some ideas to get started…

1. Educate your salespeople on the bottom-line impact of discounting. In most cases, salespeople don’t know how discounts affect the company. Salespeople are trained to make sales and they typically view any sale as a good sale. When salespeople understand the numbers (how discounts at each level affect profits and margins) and the implications (smaller bonuses, lack of budget for new equipment, etc.) they’ll think about pricing in a whole new light.
2. Update the compensation plan to maximise profits instead of volume. Switch the plan to a margin basis, or at least a blend of volume and margin, to counter the habitual discounters in a sales team.
3. Introduce a discount contra-plan. Require salespeople to ensure that that all daily transactions pass an average margin test and contribute to the bottom line. Expect salespeople to have a plan to catch-up for any transaction priced below the budgeted company margin. When salespeople realise that they will have to work 30.0% harder, just to stay where they are, they’ll soon stop giving away discounts.
4. When working with customers, document the “favours” you do for them in a logbook so you’ve got a written record of the value you provide. Then use it to justify undiscounted prices. Customers will pay more if they understand you bring certain value to the deal.
5. Make your “C” customers pay in full. Most salespeople know the theory – every company has A, B, and C customers. A customers are the big, top tier customers who make up the bulk of your revenues. On the other end of the spectrum are your C customers, the ones who demand deep discounts, overload service department, and pay their accounts as late as possible. Starting by put all Cs on full list price with no discounts. When salespeople complain that they’ll lose these customers management should show them it’s a good thing – if the company lost most of its Cs, bottom-line would improve.