The salesman says that we do not get this order without a huge discount. There are few managers who can resist the smell of orders, even when the discount is high. And it is probably right, as the sales department´s top task after all and foremost, is to bring home orders.
Warning, warning! Management must understand the signals. So, what is this all about? Well, it is a balance act between customer satisfaction and coverage of own fix and variable costs.
All companies are structured to provide a product or service to a certain customer type at a certain price. When full prices no longer are possible to get – discounting helps.
But only for a while, as the market clearly and loudly says that cheaper alternatives do exist! Continued discounting with limited cost coverage is understandable, but only for a while. Now actions are required immediately!
There are only three options;
- Reduce your costs and thereby your sales price so it will be accepted without discounts
- Develop your offer to justify the current price
- A little of both.
This balance act is managed by correcting the offer to the market, and often also the business idea, so that both describe what you offer and what you want back from the market in terms of cost coverage and profit.
It is all about choosing – adding or reducing products and features Adding is simple. Reducing is very difficult – like dieting dull and boring, but necessary!
SAS is an example of a company who constantly find itself in the spiral of an eternal cost saving to meet the low-cost carriers price competition without going bankrupt.
It is important to understand the balance between the external offers and their corresponding internal cost pressures and thereby your overall operational efficiency.
This is how you learn about your current situation
Ask your financial department to check the development of discounts over the past twelve months (month by month).
- If the tendency is increast discounting: Try to reduce your costs and thereby your sales price so it will be accepted without discounting or develop your offer to justify the current price or a little of both.
- If the tendency is steady: Enjoy the situation!
- If the tendency is decreasing: Do not believe it and check again! Still true: Congratulations! Increase your sales prices directly.