9 min read
Almost every business owner I know makes this one single mistake that costs them dearly in the long run.
I used to believe that getting a sale was always a good thing. Meaning, that even if I gave a discount to the customer to get their business, it was better than not getting the sale.
I thought that because I was generating revenue and customers, even if my profit margin was reduced, it was ok because that sale and customer would lead to more profitable sales and customers.
But here’s the hard truth I discovered by making this mistake.
When I discounted what I was selling, it ended up creating more problems. And contrary to what I hoped, it never lead to more profitable sales or customers–just more discounted sales and customers who wanted the same discounts.
When you discount your products or services, that creates expectations for future discounts. The customer expects to get the same deal the next time. And if your customer doesn’t get the discount, then he/she has to pay the regular full price and this is where the friction occurs.
What is the first thing you do when you buy something? You compare the price. If you have bought it before, you compare the price to what you paid previously. If you are paying less, it’s a deal. If you are paying more, it hurts.
The customer you gave the discount to feels actual pain the next time they buy from you unless of course, you continue to give them the discount. So their business never becomes more profitable.
And this is why this becomes a real problem for your business.
Over time, you accumulate customers who are being discounted with the hopes of getting more profitable customers. But that cannot physically happen and here is why.
Your business is busy serving those discounted customers. They are taking up your company’s resources and focus, leaving little room for the newer more profitable customers.
The problem only gets worse the more of these less profitable customers you take on because your overhead starts to increase, reducing your net profit margin, unless you are able to achieve economies of scale within your business. If you are a service-based business, there aren’t a lot of economies of scale without the introduction of software and automation.
Your profit margins get stuck at a very thin percentage, which chokes the growth of the business. This also becomes very frustrating for the business owner since there is a lot of business but not a lot of profit. You start to ask yourself “is this really worth it?”
At this point, you are probably wondering what this has to do with branding. Here’s what I learned.
Before we get too far into the solution, let’s step back and look at the meaning of branding. A lot of people think of their logo when they hear the word “brand,” but the term brand actually dates back to early civilization in Asia. A ‘brand’ was a mark that pottery makers would stamp into their pottery. This mark identified the maker of the pottery and was the single way to tell the quality of the pottery.
See ‘brand’ represents quality. It makes it easier for people to identify something of quality. You know when you see a Mercedes mark (the circle with the tri-star) that the vehicle is quality. You know that if you see a checkmark on a piece of apparel, that garment is good.
Yes, you know the brands by name, and that is part of the brand too (we’ll cover that in a minute), but at the core of what the mark communicates is ‘quality.’
Let’s get back to the problem at hand: discounting what you sell.
What I learned is that when I would offer discounts, this began changing what my brand represents. People associated it with deals and discounts, not quality. It started to attract like-minded customers for that reason, and the next thing I knew, the brand’s value had dropped.
But here is the long-term effect that most people never consider. Far more detrimental to a business than any discount.
You have probably heard the term “brand equity.” Most people think this just refers to existing brand awareness and how well-known your brand is in the marketplace. While that is part of brand equity, the more important thing to know about brand equity is that it has real monetary value.
Some businesses actually carry a line item on their balance sheet for brand equity. Many times, when businesses sell, they are able to sell at a much higher multiple based on their brand equity. Even if you go out of business, you can sell the brand.
The best example of this is Craftsman tools when it was sold to Stanley Black & Decker. Craftsman was a brand of tools sold exclusively at Sears since Sears owned the brand. But when Sears started closing stores, they also started selling off assets. One of these assets was the Craftsman brand.
Stanley Black & Decker purchased the Craftsman brand and would eventually strike a distribution deal with Lowe’s. In traditional M&A deals, you would review a business’ revenue, net profit, assets, liabilities, and many other factors. But in this case, the revenue and net profit were nearly irrelevant because those were reflective of sales that came through Sears, a sales channel that would be eliminated after the acquisition.
Granted, it does give the potential buyer an idea of the opportunity, but from a traditional acquisition perspective, it’s a really big gamble to buy a business that is going to lose its only sales channel. But Stanley Black & Decker bet on their ability to find a new sales channel–one that would net even greater sales and profit: Lowe’s.
I tell you this story to show that brand alone is worth a measurable amount of value for your business. Maybe not $900MM, but it can be calculated.
When you build a brand that communicates quality and you remain vigilant about communicating that value when you sell to customers, you attract customers who will pay for that quality.
These customers attract more people who are looking for the same level of quality and they become your customers. Your brand becomes more desirable to onlookers and you build a brand that people aspire to buy.
Mercedes isn’t for everyone, but everyone knows Mercedes are good cars to buy.
Everyone won’t buy from you, but everyone will know you are the best. And that is the big mind shift you have to overcome. There is always someone willing to pay more for quality.
Another example to prove this point: Mercedes make an SUV called the G-Wagon. It retails for a whopping $250,000 (sometimes more). That sounds like an expensive SUV, doesn’t it? Well, there is another company called Brabus that specializes in modifying high-end vehicles and selling them at a higher price. They are able to sell the Mercedes G-Wagon with their upgrades for $875,000.
There is always someone who has more money and is looking for higher quality. Do not be afraid to charge what you and your products are worth. In the long run, you will be more profitable, build a stronger brand, and have the ability to sell your brand and business for the multiple you deserve.