What’s that drip, drip, drip sound? It’s your profits going down the drain with every discount you give, says Laurie Owen.

[h3]10% Off Costs[/h3]

[dropcap cap=R]epeat after me. “My name is _________ (fill in your name) and I am a discounter.”[/dropcap]

I can hear your denials now.

“No, no, I’m not really a discounter because I only discount (select one of the following) … occasionally/on certain items when I might lose the sale/socially with good friends.”

Ladies and gentlemen, let’s stop the denial, step up to the problem and begin the healing process. Discounting is a bad habit that can lead to a serious decline in profits and company health. Just like any bad habit, it takes practice and diligence to break. Here’s a 9-step discounting recovery program to help you change your ways.

[componentheading]STEP 1[/componentheading]

[contentheading]Understand the True Cost of the Problem[/contentheading]

Ever had a leaky faucet? While you may have ignored the steady drip, drip, drip for a while, I bet you had that faucet fixed in a flash once you realized how much that leak was costing you. It’s the same with discounting. Those “5-percent-offs” here and there add up to some serious dollars over time.

Remember our breakeven formula from last month? This time, we’ll use it to determine how much more in sales you need in order to make up for your discounting habit.

Let’s assume that a company made $500,000 in sales from loose diamonds that were all discounted by 10% more than what they believed was a “fair” price to charge a customer.

“Normal” gross profit margin = 40% (60% Cost of Goods Sold)
————————-
Less commission, credit card discount, etc. -10%
————————-
“Normal” Contribution Margin = 30%  
(or total Variable costs of 70% = 60% + 10%)

If this company had charged regular price instead of discounting 10%, its gross sales would have been: $500,000/.9 = $555,555
————————-
60% Cost of Goods Sold = ($333,333)
————————-
SUBTOTAL = $222,222
————————-
Commission + Credit Card discount ($55,555)
————————-
No-discount Contribution margin $’s = $166,667 (30% CONTRIBUTION MARGIN PERCENTAGE)

But remember, everything you’ve sold is discounted by 10%. So:

GROSS SALES = $555,555 x .9 = 500,000
————————-
Cost of Goods (still the same) = ($333,333)
————————-
Commission + Credit Card discount = ($50,000)
————————-
DISCOUNT CONTRIBUTION MARGIN = $116,667
(23% CONTRIBUTION MARGIN PERCENTAGE)

Under full price, for every $1 of fixed costs, you needed to make $3.33 in sales. ($1 / .3 = $3.33).
But under discounted pricing, for every $1 of fixed costs, you now need to make $4.35 in sales. ($1/.23 = $4.35)
Compare the two figures — $4.35/3.33 — you get 30.6%.

That means that for every 10% of discounting you do, you need to increase your sales volume by over 30% to make up for it! That’s a lot of sales to close in order to make up for a moment (or two or three) of weakness.

[componentheading]STEP 2[/componentheading]

[contentheading]Phase Out the Discount Drip[/contentheading]

— Discount in dollars, not percentages. To your customer, it will sound like a substantial price drop, but you’ll wind up with more money in your pocket than if you’d cut it by 10 or 20 percent.

— Reduce the discount you offer in any promotion by 5%. I bet you will see no difference in the redemption rate if you take it from 25% to 20%, but you will see the impact in more profits.

— Remove calculators from your sales floor. They are the biggest enabler when creating a discount scenario.

— Discount for payment that day by cash or check only. Holds, layaways and “house accounts” add to your cost of completing the sale and are silent margin killers.

[componentheading]STEP 3[/componentheading]

[contentheading]Get A Sponsor[/contentheading]

Get a sponsor. Line up a buddy who has already kicked the discount habit, have his number programmed on your speed dial, and call when you hit a moment of weakness. You’ll start thinking “what would my buddy do?” More often than not, your buddy will say “hold your price.” Or, even better, join a performance group.

[componentheading]STEP 4[/componentheading]

[contentheading]Reward the Right Behaviors[/contentheading]

Base commissions on gross margins rather than gross sales to discourage discounting and encourage higher profits.

[componentheading]STEP 5[/componentheading]

[contentheading]Invest In Sales Training[/contentheading]

It may cost a little up front, but it will save you own the road as your people stop falling back on discounting to close the sale.

[componentheading]STEP 6[/componentheading]

[contentheading]Provide A Good Example[/contentheading]

Chances are your staff will be less inclined to discount when they see you holding the line, especially with your buddies or VIP’s.

[componentheading]STEP 7[/componentheading]

[contentheading]Stop Discounting Hot Sellers[/contentheading]

Get top prices on your good stuff. But for items over a year old, get the red pen out; make sure they go home with new owners.

[componentheading]STEP 8[/componentheading]

[contentheading]Belive in Your Product[/contentheading]

And also believe in your right to a fair return on your investment. If you don’t truly believe that you give your customers value, you’ll be more likely to discount.

(AUTHOR’S NOTE: This article was co-authored by my partner Carl Forssen, and my colleague Larry Rickert, of Avenue Jewelers and Jim Kryshak Jewelers. Larry is a recovering discounter who lives in Madison, WI.)

[componentheading]LUCKY NUMBERS[/componentheading]

[contentheading].85[/contentheading]

What is it? That’s how much the top 25% in our 2006 FIT Jewelers Financial Benchmarking Study owed for every dollar they owned. This ratio is known as “Debt to Worth”. It’s computed by taking all of your liabilities and dividing by your net worth. With this ratio, a lower number is better. All the other companies in our study had a “debt to worth” ratio of 1.49, meaning for every dollar they owned, they owed creditors and vendors $1.49.

Strategy: Pay down debt and get more profitable. Easier said than done, we know, but let’s face it — if you had a limited amount of money to lend, would you rather lend it to a company with a low debt to worth or a high debt to worth? Also, if you’ve loaned money to your own business you might be able to have it re-classified as equity, thus improving your debt to worth ratio. Can a company’s debt to worth number ever be too low? If you are passing up opportunities in your market by sitting on money versus expanding, it could be.

Laurie Owen is senior vice president at Business Resource Services. Contact her at brs@brs-seattle.com.

[span class=note]This story is from the April 2007 edition of INSTORE[/span]