Q. Customers ask every year at “budget” time for us (as their main distributor) to give them a better discount. Will this ever stop?
Q. How can we continue to grow when we keep giving away margin?
A. Let’s think about this one together.
If your margins are greater than the average in your industry, and you are a well-managed company, you could probably give away some of that margin to your customers without any severe repercussions to the company.
If that’s not the case, then the answer is obvious. You can’t subsidize your customer’s business – at least not many of them. You must make a profit, and you must make a pretty significant profit if you want to fund your growth out of the cash flow from your operations.
I suspect, in this case, that you are giving away margin to keep the business. If your margins are excessive, you can probably do this for a while. But there is a point at which any further degradation of the margin means that you are servicing this account unprofitably. There may be strategic reasons to do so, but from a purely economic point of view, you can’t do that very often or for very long. Either one of those choices will result in the early demise of your company.
So the answer to your question is, “You won’t for very long.”
But that’s not the real issue. The real issue is
“Why are you giving away margin?”
The answer says more about you than it does the customer.
Customers will continually ask for lower prices because that’s their job. But just because they ask doesn’t mean that you have to give in. While there may be times and places when reducing your margin may be a wise thing to do, generally speaking, it’s not recommended. Here’s why:
- When you discount your margins, you train the customer to continually ask for bigger discounts. Your customer thinks, “If it worked this time, why won’t it work again?”
- When you discount your margins, you train the customer that your prices are negotiable and that your stated price is not your real price. So, again, you train the customer to continually ask for discounts.
- When you discount your margins, you send a message that your company really does not add any value to the equation, and you sink to the level of the low-price competitors.
On the other hand, when you refuse to discount, you:
- Send the message that your price is fair for the value that the customer receives.
- Send the message that your prices are not negotiable.
- Send the message that there is integrity in your pricing and in your business.
When it comes down to it, the real reason that you are giving away margin is that you are afraid to lose the business to a lower-priced competitor if you don’t. That’s a fear that you must face if you are going to be successful in the long term. Until you get over that fear, you’ll forever be at the mercy of the discount-demanding customers.
There are worse things than losing a piece of business to a low priced competitor.
Refuse to discount, and walk away from the business if you have to. In the long run, you’ll be more confident, you’ll have a greater personal presence, and you’ll reduce the incessant clamoring for discounts. If the customer moves to someone else, they may come back to you if the competitor messes up. And, it’ll free your time to invest in customers who are not so price-conscious.