Salesfolks: Should Your Business Consider Discounting to Maintain or Grow Sales in the Current Economic Climate?

The economic landscape has been tumultuous over the past few decades, with significant events like the Great Recession and the COVID-19 pandemic leaving indelible marks on the global economy. The Great Recession, which lasted from December 2007 to June 2009, was a period of significant economic downturn. More recently, the COVID-19 pandemic from 2020 to 2022 brought about dramatic shifts in how businesses operate, with many experiencing a "COVID Bump" due to increased demand in certain sectors as people stayed home and worked remotely. However, these periods also saw governments increasing debt through economic impact payments and programs like the Paycheck Protection Program.

Throughout this time, an unprecedented low-interest-rate environment existed, allowing businesses and governments to borrow extensively. With interest rates now rising (the U.S. Fed Rate is currently at 5.3%), many businesses and governments are struggling with high debt loads. This has led to a phenomenon known as debt-induced zombification, where companies are barely able to keep up with their interest payments. Likewise, governments are saddled with debt, led by the U.S. with a staggering debt load approaching $35 billion. Authors Note: there are an estimated 7,000 global public companies, 2,000 in the U.S., that are considered debt-laden zombies.

Whether we are headed for a recession or not is still being widely debated. But the reality is that many sectors of the U.S. economy are experiencing economic flattening or contraction. This economic context raises the question: "To maintain or grow sales, is now the time to consider discounting?"

Let’s explore the pros and cons of discounting, how businesses can effectively implement discounting strategies, and whether focusing on sales volume is more important than margin protection in the current economic climate. Additionally, we will discuss selling tactics that can help get prospective client deals across the finish line.

The Case for Discounting

Pros

Stimulating Demand: In a contracting economy, consumers and businesses may become more price-sensitive. Discounting can make products and services more attractive, potentially stimulating demand and increasing sales volumes.
Clearing Inventory: For businesses holding excess inventory, discounting can help clear stock that might otherwise go unsold. This can be particularly beneficial for perishable goods or items that become obsolete quickly.
Building Customer Loyalty: Offering discounts can attract new customers and retain existing ones. Loyalty programs that include periodic discounts can foster long-term relationships and repeat business. Short-term discounting can lead to long-tail repeat business.
Gaining Market Share: By lowering prices, businesses can attract customers from competitors who may not be offering similar discounts. This can help increase market share and establish a stronger market position.
Cash Flow Improvement: Increased sales volume through discounting can improve cash flow, which is crucial for businesses struggling with liquidity issues. This immediate influx of cash can help cover operational costs and debt obligations. Going to a bank or factoring business to beef up a balance sheet to support cashflow swings is more painful now that borrowing costs are much higher.

Cons

Margin Erosion: The most obvious downside of discounting is the erosion of profit margins. Lower prices mean less profit per unit sold, which can be detrimental if not offset by a significant increase in sales volume.
Brand Devaluation: Frequent discounting can lead to the perception that a brand is less valuable. Customers may come to expect discounts and be unwilling to pay full price, undermining the brand’s long-term value proposition.
Customer Expectations: Once customers become accustomed to discounts, it can be challenging to revert to regular pricing. This can create a dependency on discounting to drive sales, making it difficult to maintain profitability.
Competitive Response: Competitors may respond to discounting by lowering their prices, leading to a price war. This can erode margins across the industry and lead to unsustainable business practices.
Financial Health Impact: For businesses already struggling with debt, discounting can further strain financial health if not managed carefully. Reduced margins can make it harder to meet debt obligations and invest in growth opportunities.

Implementing an Effective Discounting Strategy To make discounting work in a way that drives sales without severely impacting margins or brand value, businesses need to approach it strategically. Here are some key considerations:

Know Your Margins Before implementing any discounting strategy, it’s crucial to understand your profit margins. Calculate the break-even point for your products and services to ensure that any discounts offered do not result in a loss. This analysis will help determine the maximum discount you can offer while still maintaining profitability.
Segment Your Customers Not all customers respond to discounts in the same way. Segment your prospects and customer base to identify which groups are most likely to respond to discounts. Tailor your discounting strategy to target these segments effectively. For example, loyal customers might appreciate periodic discounts as part of a loyalty program, while new customers might be attracted by introductory offers.
Use Time-Limited Offers Create a sense of urgency by making discounts time-limited. Flash sales, seasonal promotions, and limited-time offers can encourage customers to make a purchase decision quickly, driving immediate sales without permanently lowering the perceived value of your products.
Bundle Products and Services Bundling products or services can add value without significantly eroding margins. Offer discounts on bundled packages to increase the perceived value while maintaining profitability. For example, a software company might offer a discounted price on a suite of products rather than discounting individual items.
Monitor and Adjust Regularly monitor the impact of your discounting strategies on sales volume, profit margins, and customer behavior. Use this data to adjust your approach as needed. If a particular discount is not driving the desired results, be prepared to change tactics.
Communicate Value Ensure that customers understand the value they are getting from the discount. Highlight the original price, the discount, and the benefits of the product or service. Effective communication can enhance the perceived value and make customers more likely to respond positively.

Balancing Sales Volume and Margin Protection In the current economic climate, many businesses face the dilemma of whether to prioritize sales volume over margin protection. The answer depends on the specific circumstances of the business, including its financial health, competitive position, and market conditions.

Prioritizing Sales Volume For businesses with excess inventory, cash flow issues, or aggressive growth targets, prioritizing sales volume might be the right approach. Increased sales volume can help improve cash flow, reduce inventory costs, and attract new customers. However, it’s essential to ensure that the increased volume compensates for the reduced margins.

Prioritizing Margin Protection For businesses that rely heavily on their brand’s perceived value or have limited capacity to scale production, protecting profit margins might be more important. In this case, discounting should be used sparingly and strategically to avoid long-term damage to the brand and financial health. Selling Tactics to Close Deals

In addition to discounting, there are several selling tactics that can help close deals in a challenging economic environment:

Highlight Cost Savings Emphasize how your product or service can save customers money in the long run. For example, if you sell energy-efficient appliances, highlight the potential savings on energy bills over time.
Offer Financing Options Provide flexible financing options to make your products and services more accessible. This can help customers manage their cash flow while still making a purchase.
Leverage Social Proof Use testimonials, case studies, and reviews to build trust and demonstrate the value of your offerings. Social proof can reassure prospective customers that they are making a wise investment.
Focus on Value-Added Services Offer value-added services such as free training, extended warranties, or complimentary consultations. These additional benefits can make your offer more attractive without significantly impacting margins.
Build Relationships Invest time in building strong relationships with prospective customers. Understand their needs, provide personalized solutions, and follow up regularly. Building trust and rapport can increase the likelihood of closing deals.

Conclusion In the current economic climate, businesses must carefully consider whether discounting is the right strategy to maintain or grow sales. While discounting can stimulate demand, clear inventory, and improve cash flow, it also comes with risks such as margin erosion and brand devaluation. By implementing a strategic discounting approach, businesses can mitigate these risks and leverage discounts effectively.

Balancing sales volume and margin protection is crucial, and the right approach will depend on the specific circumstances of each business. Additionally, employing effective selling tactics can help close deals and drive sales in a challenging economic environment.

As businesses navigate these uncertain times, it’s essential to remain agile, monitor the impact of discounting strategies, and adjust as needed. By doing so, businesses can continue to thrive and grow, even in the face of economic challenges.