The dangers of discounting

By Peter Cox August 04, 2015 Industry news

Why is the hardware / trade industry endemic with what I call uncontrolled discounting?

Is it because we are selling commodity products with the same brand and cannot offer any real alternatives to the customer than our opposition? 

Could it be that we have always discounted and the price on the computer is not really the price and the builder knows this?

Excessive discounting in my opinion over any period of time creates an unsustainable marketing position in that customers not only lose trust in your store but also perceive that your margin is too high and you can cut the price when you choose.

Some discounting is necessary, to reduce “dog” lines as well as be competitive in the marketplace. 

However there are some stores in this industry which constantly commit the cardinal sins of reducing margin: reducing profit and thus going out of business.

How do they do this? What are they doing wrong?

  1. Their only marketing tool is dropping the price.
  2. Believing reducing costs is the most effective strategy. Accountants love this theory – and, as staff are the biggest overhead, they reduce staff hours and numbers. So, although this helps in the pursuit of short term profit, in the long term the damage to the store’s reputation and customer relationships is irreparable.
  3. Not knowing the overhead percentage to just open the doors each day. If the cost of doing business is 25% of sales – that is wages, rent, power etc – then if you are not marking up products by 33.3% you are not even going to break even. The difference between mark up and margin is still a mystery to a lot of people in this industry and we are in 2015!
  4. Automatically following the marketplace and trusting the customer is telling you the truth on your competitor’s pricing strategy. In this industry the price on a pallet of cement or pipe is determined by how much you are buying, when you are buying and who the trade customer is. Of course the classic repost to the customer who is using the opposition to get a discount in your store – “At that price can you get me some too” – is a very valid reply!
  5. Blaming everyone else for the drop in margin. It is now several years since the GFC but how many hardware and trade stores still blame it for the drop in their Gross Profit Margin. Making excuses will not increase profit – you need to control what you can control! Good hardware / trade retailers understand this and, rather than allowing profits to drop, they increase staff training and service levels to differentiate themselves from the opposition. Yes, sometimes you have to spend money to make money. Motivated staff make for motivated customers!

In summary, if you control the ball you control the game. You really can control the five “Ps”:

  1. The Product you sell.
  2. The way you Promote.
  3. The Place you do business.
  4. The People who sell to your customers.
  5. And, importantly, the Price you sell the product for.

A great hardware / trade store from my experience is the result of being able to control these five factors and by trying to be the best they can be and to control what they can control, not the opposition, nor the international economy, nor just the price they sell the product for.  

 


 

Peter Cox is a senior consultant for Macquarie Advisory Partnership based in Sydney. He has over a decade of experience training and consulting in the retail hardware industry. He conducts key-note addresses, and management and sales workshops, which are aimed at improving profitability and liquidity in one of Australasia’s most competitive retail  environments. Phone 0061 438 712 200 or visit www.petermcox.com.au

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