In response to COVID-19, and in accordance with CDC guidlines limiting in-person gatherings, this event has been cancelled.
Discounts off of standard pricing should be considered part of the cost of sales (internally, at least), but most companies don’t track discount spend as rigorously as they should. CFOs should take ownership of tracking and measurement at the very minimum.
Reminder: every dollar of discount comes off of your bottom line. When you discount, you’re donating your profit dollars to your customer’s bottom line. There can be good reasons to do this, but do you think your sales teams only use the good reasons?
Second reminder: the purpose of any company is to create more value (and charge for it) than it cost them to produce. Your business is your products and services and the customer value you create. Discounts should only be used when your value isn’t high enough…not as a bandage for when your salespeople didn’t help build it the way they’re supposed to.
Let’s start by understanding your discount policies. We’ll describe a typical process, a tiered authorization model, but I’ll want you to diagram your actual process for yourself:
- Salesperson authorized to discount x on their own judgement
- Sales manager has second tier
- On up to “final authority”
Diagram your process. Don’t know it? Then you’ve found your first step in your process.
Now, within your policy, do you track every discount dollar? Starting from the first discretionary dollars discounted by the salesperson (for instance)? If you don’t track discount spend like any other expense, you can’t manage it. You need to be able to analyze how you allocate your discount spend. Gather it in a way so you can determine – for starters -- how it looks:
- by sales person,
- by sales manager,
- by customer,
- by market,
- by product,
- by time frame (end-of-month/quarter/year)?
Now let’s peel back the onion. What are the reasons, or justifications for discount spend?
- Are justifications objective, or are they easy to game by the whiniest sales person? How close are they to the opposite end of the spectrum: “we’ve measured customer-perceived value, grown it by all we can, and value still comes up short of price”.
- Can do those justifications drive solid business decisions on:
- Product development,
- Marketing strategy,
- Competitive activity,
- …or do they shine a light on sales preparedness?
- Hint: if your discounting sounds like subjective rationalization, it probably isn’t a problem with objectively determined customer value. Because all pricing should come down to customer perceived value.
If you don’t know where those dollars are going or how they’re being justified, you’re flying blind. Your real cost of sales might be much higher than you think.