Stop Giving Discounts Just to Close the Deal

A customer asks for 10% off. For a small business, that decision can have a bigger effect on the money left after each sale. A customer is ready to place an order, but wants a better price. The business owner has already worked out the costs, added a margin and sent the quotation. Now there is pressure to reduce the price to secure the deal. This happens regularly in small businesses, particularly in markets where customers compare prices and are quick to negotiate. Some owners would rather accept a lower amount than risk losing the customer. Others offer discounts because they believe a bigger number of sales will make up for the reduction.

The problem is that more sales do not always mean more money for the business. Consider a business selling a product for R1,000. It costs R700 to buy or produce the item, leaving R300 to contribute towards rent, salaries, electricity, transport and other operating expenses. If the customer receives a 10% discount, the selling price falls to R900. The direct cost remains R700, leaving only R200 from the sale. The business has reduced its contribution by R100, or a third, simply to close the deal.

What happens when discounts become regular?

The effect is easier to see when the business makes several sales. If it sells 100 units at R1,000 each, with a direct cost of R700 per unit, it generates R30,000 in contribution. At a discounted price of R900, the contribution from those same 100 units falls to R20,000.

The business is now R10,000 short before paying its monthly overheads. To generate the original R30,000 contribution at the reduced price, it would need to sell 150 units instead of 100. That means finding 50 additional customers or selling more to existing ones. For a small retailer, manufacturer or service provider, that extra volume may be difficult to achieve. It could also mean more stock, additional staff or higher delivery costs.

Set a price you are not prepared to go below

Business owners should know their minimum acceptable selling price before negotiating with customers. Using the example above, the product costs R700. If the owner wants to retain at least R250 per unit towards overheads, the minimum selling price would be R950.

The calculation is simple:

R700 direct cost + R250 required contribution = R950 minimum price.

This gives the owner R50 of room to negotiate. Any reduction below R950 means the business is accepting less than its planned contribution. The R250 is not profit. It still has to cover operating expenses, and the owner needs to check whether that amount is sufficient. The calculation should also be updated when supplier prices, wages, transport or other costs increase.

There are other ways to negotiate

Reducing the price is not the only way to accommodate a customer with a limited budget. A business selling a service package, for example, could offer fewer hours or remove additional services. A supplier could quote for a smaller quantity, while a retailer could give customers the option to collect their purchases instead of including delivery.

Another option is to negotiate around order size. A customer buying 50 units may qualify for a lower unit price if the larger order reduces packaging, production or delivery costs. The saving should be calculated before a discount is offered. Payment terms can also form part of the discussion. A customer who pays upfront may help the business avoid waiting 30 or 60 days for money. A small price reduction could be considered if the benefit of receiving payment sooner makes up for it. In each case, the business is changing the terms of the deal rather than simply taking money off the price.

How to respond when a customer asks for a discount

The conversation does not have to end with the business accepting or rejecting the customer's request.

An owner could respond:

“The price is R1,000 for the product and service included in the quotation. If your budget is lower, we can look at reducing the quantity or changing what is included. If you need the full package, I would need to keep the price as quoted.”

This gives the customer another way to approach the purchase without forcing the business to absorb the reduction.

What should the business measure next month?

For the next 30 days, business owners should record every discount given and calculate how much it reduces the contribution from sales.

Two figures are particularly useful:

• Average discount given: Add the total value of discounts and divide it by the number of discounted sales. If 20 customers receive a combined R2,000 off, the average discount is R100.

• Contribution lost through discounts: Calculate the difference between the contribution at the normal price and the contribution after each discount. If 20 customers each receive R100 off and direct costs remain unchanged, the business gives up R2,000 in contribution.

The owner should also record why each discount was offered. Was it linked to a larger order, faster payment or a customer who was simply unwilling to pay the quoted price? That information can help identify whether discounts are bringing useful business or just reducing the amount left from each sale. For small businesses, the pressure to secure orders is understandable. But a full order book does not help much if the prices being charged leave too little money to cover the cost of running the business.