Do Price Discounts Guarantee More Sales?
Kedar Gharpure shares an article on pricing and a warning on the pitfalls of discounting prices in the hope of gaining volume sales.
Price is an important negotiation element in any B2B sale – and often made out to be a sticking point by the customers. Hence, it is no wonder that B2B companies often consider discounting their prices to win a deal or to secure more volume. However, most companies usually underestimate the incremental volume that they will need to sell to make up for the profits lost due to discounting. Not convinced? Read further…
Price has a disproportionate impact on EBIT
The impact of 1% price increase on EBIT vs. that of 1% volume increase is probably common knowledge by now. This insight was published as far back as 1992 in a HBR article based on financial data of c. 2500 companies. The analysis was further updated by McKinsey & Co. to include S&P 1500 companies in early 2000’s. Both analyses show that EBIT increase due to 1% price increase is more than 3 times of what can be achieved by selling 1% more volume. We took that analysis a step further and found that the impact of price on EBIT can be even more dramatic for a B2B company depending on the underlying business model.
For our analysis, we considered 3 archetypes: i) Trade Co.: Trades products or services for a small profit and has a significant proportion of variables costs; ii) Capex Co.: Works in capex intensive sectors and has a significant proportion of fixed costs; iii) Average Co.: a typical manufacturing company with a balance of fixed and variable costs.
Key points include:
Price impact on EBIT
Volume needed to make up price discount
Read the full article, Watch out before you discount price to gain volume!, on Linkedin.