Presents

DISCOUNTING — PROS & CONS

By Todd Bingham

©2002 Todd Bingham Fine Art 1016 Eucalyptus Ave., Vista CA 92084

800/697-8935 | www.toddbinghamfineart.com | fax: 760/806-9622

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TBFA/Todd Bingham Fine Art

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DISCOUNTING — PROS & CONS

WHAT IS DISCOUNTING?

A much more fruitful approach to that question might be to first consider what discounting isnot:

• Discounting is NOT the activity of selling something for less

• Discounting is NOT a gesture of good will

• Discounting is NOT a way to buy friends and influence people

• Discounting is NOT a strategic method for staying abreast of the competition

WHAT IS IT THEN?

• Discounting IS the basis on which a customer satisfies his or her mind that she is nota fool

• Discounting IS a query on behalf of your customers that what they are purchasingfrom you has VALUE

• Discounting IS a sure fire method of ensuring the short life span or your business

HOW DID DISCOUNTING GET STARTED?

It goes back to Adam & Eve. I can just see Satan sidling up to Eve and hissing:

“SSSsssssay, want an apple?”

To which Eve probably replied, “Well, if I get one for Adam, too, can I get a better price?”

In my first book, “A Manual for Art Sales” I discussed—or more accurately, complained about—the issue of customers asking us for discounts. I’m not sure why people have come to believe thatnegotiating discounts on art is a more acceptable activity than negotiating better prices onmedical checkups or home repairs. But it doesn’t matter. The fact of the matter is, that’s what alot of our customers think. And we have to deal with it.

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WHO DOES IT?

A DEALER WILL DISCOUNT WHEN:

• S/he is desperate

• S/he has come up against someone who is better at negotiating

• S/he thinks it’s the only way to do business in his or her area

• S/he is afraid of losing a sale

But really, here is what is so:

NO ONE WANTS TODISCOUNT

WHY DO THE CUSTOMERS WANT DISCOUNTS?

There are many, many different spins on why people jam us for discounts. I’ve met many power-ful businessmen and women over the years, who just love the chase. They relish the negotiationsalmost more than they do the art. And to them, it’s a cat and mouse game that they will will-ingly play with you.

Years ago, as a gallery director in Las Vegas, I had a customer with whom I was involved inintense negotiations on a very expensive work of art. We went back and forth for almost half anhour. I went in and out of the viewing room repeatedly, not getting much closer each time, butneither of us choosing to walk away, either. Finally, the customer—a very powerful and compel-ling guy—sent his wife and the other salesperson out of the room and said,

“Okay, Bingham, we’re two grand apart. Let’s flip for it.”

“Pardon me?” I said, mouth open.

“Heads you give it to me at the price I want, tails I’ll take it at sticker. Not even your current price.The full retail. Whattya say?”

I couldn’t believe it. We were talking about the difference of two thousand dollars! I gulped.

For some reason, I said okay. We flipped. He lost.

He loved it. He laughed uproariously as he started peeling off one hundred dollar bills from abankroll the size of a hockey puck.

It wasn’t the money. It was the game. The risk. To him, it made the deal exciting and the artworthwhile. And I’m sure you’re thinking that this incident could only occur in a gallery in LasVegas. I don’t agree.

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Bearing in mind that there are at least four different personality types that you are likely to encounter,and three of them are your art buyers, then it stands to reason that one out of three people who beginjamming you for a discount are going to be doing it because of the chase and not necessarily the art.

WHAT IS IT REALLY ABOUT?

• MONEY

• POWER?

• CURIOSITY?

• SELF ESTEEM?

• THE GAME?

Here is what’s so:

IT’S RARELY ABOUTTHE MONEY

HOW DOES IT AFFECT MY BUSINESS

It’s not difficult to gauge the long term effect of continual discounting. All one has to do is talkto a few dealers who are no longer in business.

Here are some of the issues I’ve noted over the last 25 years in being in the art game:

• Once you sell a customer at a discount, you sell that customer at a discount forevermore, along with all of his friends and neighbors

• Once you get known as a gallery for frameshop that will discount, the word getsaround (like a brushfire)

• The 90/10 Margins rule. If you give up a ten percent gross margin of profit it feelslike you made a sale. It feels like you made a profit. The problem is that everyonemakes money except you. That transaction still represents a line item on your P&L.And in retail, if you’re not working at least at Keystone Margins, you’re workingbackwards.

• “Profit doesn’t mean a thing if you can’t pay your bills...” I borrowed that from JayGoltz’s book.

HOW DOES IT AFFECT THE ART BUSINESS AS A WHOLE?

Why is the art business one that is known for discounting? I don’t know. I suppose it has some-thing to do with art being a discretionery item.

Here are some points to consider:

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• Value is what people want and what they test us on (by asking for discounts).

• How can we establish value if we’re all inclined to test it ourselves?

• How can we ensure the staying power of the artist’s career (and hence our industryand our businesses) if we are continually undermine it by casting a question as tovalue of the product?

• Are art dealers going the way of...lawyers?

• Are we expected to go on a Crusade?!

HOW DO OTHER DEALERS DO IT?

Most dealers just mark things up just to be markin’ it down. You don’t want to be that kinddealer, you do?

And if you don’t discount, how do you do that?

BINGHAM’S DISCOUNT DEFLECTION PRESENTATION:

I used to use a small discount deflection presentation, and prescribed it for use by the gallerydirectors when they were faced with the prospect of discounting. When this presentation isdelivered to a customer it can help head off their thinking when negotiating a substantial dis-count on a work of art, or with a package deal. It goes like this:

“Well, Mr. Customer, I respect your position. And I’m not insulted that you’ve asked for a discount. IfI were you, I’d want to make the best deal I could on this (these) work(s) of art, too. It’s just that ourapproach to pricing has a formula to it that I believe is good for everyone involved—both you and thegallery and the artist. Let me explain how we do it. We take the work of art, what it costs us to buyfrom the artist, and to that we add our overhead, what it takes to run our business. Then to that weadd a ten percent margin of profit. That’s it. And to discount the price can really cut into ourprofitability. It’s good for you and the artist, but not the gallery. We have to be profitable, or we’ll beforced to close our doors. It has to be good for everyone.”

Now this account is is pretty close to reality. If an art retailer in today’s marketplace can realize aten percent net margin of profit, pre-tax, she’s doing pretty well! And it’s okay if customers aremade to understand that. A danger here though, is to get too involved in this explanation andbegin justifying your position too much. The customer doesn’t want to hear you complainloudly about the costs of materials and shipping expenses and the rest of your business woes. Hehas his own business woes, and he’s on vacation. It won’t hurt to give him a brief idea of yourposition on discounting, however, to set him up for the “no”. (Of course, you have no intention

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of saying no.)

However it goes, the crucial ingredient to this ‘discount deflection presentation’ is that you mustCLOSE AGAIN. You have to ask for the sale again!

REMEMBER THE OLD 4 X 5 RULE:

80% OF ALL SUCCESSFUL CLOSESOCCUR AFTER

4 TO 5 CLOSING ATTEMPTS

WELL IF I DISCOUNT, HOW DO I DO IT AND STILL SAY IN BUSINESS?

GET BETTER AT NEGOTIATING

I recommend you make it a policy in your gallery that no one discusses the discounting of awork of art, or a package deal but the gallery director or owner. Not because you don’t havesalespeople on your staff who are savvy enough to handle it, but because of the dynamic thatalmost always seems to be present in these circumstances—the customer has to know that he istalking to the last guy (or gal, of course) in the company. There isn’t anyone to whom he can go andget a better price (or use as an excuse to forestall the sale).

One large gallery operation, out of a sense of expediency I suppose, used to permit the sales-people a certain percentage of discount they could allow, before having to consult management.Ridiculous. What happened? The salespeople took the path of least resistance and gave away thatmargin of discount on nearly every deal. Folded their tents immediately. Even went so far as tomention the ten percent right up front. Not only did the gallery regularly lose that margin ofprofit , it also undermined the perception of the art and the gallery in the minds of the custom-ers.

Remember, when a customer gets a discount on a work of art too easily, the one thing that willpredictably run through his mind as he’s walking down the street with it, is:

“Gee, I wonder if I could have gotten a better price, if I’d only hung in there a little longer.”

or, worse,

“I wonder what this thing is really worth?!”

If the customer has had to go through the salesperson to get to you, and you have given thediscount presentation to him, and didn’t agree to a discount, but didn’t disagree either, you haveestablished the idea that whatever price you do give him, will be the last price. Once the cus-tomer has heard your pricing presentation, you will be in a much better position. Because that’swhat the customer really wants to know—what’s the last price?

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WHEN A CUSTOMER ASKS “WHATS YOUR BEST PRICE ON THIS?”WHAT THEY ARE ACTUALLY ASKING IS, “WHAT’S THE LAST PRICE ON THIS?”

WHO’S GOT THE POWER? YOU BETTER HAVE IT!

We’ve all read books on negotiating and we know that in order for a negotiation to successfullyconclude, both parties have to be motivated to reach a deal. And when one party is more moti-vated than another, s/he has the weaker position. The guy who is willing to get up and pass willhold the advantage. It’s what I like to call the ATWA - the ability to walk away.

We, as art dealers are put into that weaker position automatically. Your agenda is to establishsome equal footing with the customer in that regard. You have already done that very effectivelywith your inspiring and heart-wrenching sales presentation (right!?)

And really, this should be your primary concern. Because it’s only good business. A discountdeflection presentation should have at its root the desire to lay a foundation with this customerin the name of service. You want to set the stage for future business. You want the customers toknow that your gallery is interested in a long term relationship with them. You want to be theirart dealer on an ongoing basis and you are prepared to be the source for all their needs now andforever in the art community. and moreover, that no one esle is going to come into your galleryand get a better price on a work of art than they did.

So you’ve given the customer a full out, 100%, soup to nuts presentation, you’ve closed withsomething really great like,

“So, what do you say, Mr. Customer, shall I write this up?”

The two of you stand there, looking at each other. Don’t blink now. He’s got to be the first oneto speak. This is a trial close. First one to speak, loses (or wins, depending upon how you look atit.) Now, the customer tells you he needs a better number. Don’t go any farther without knowingthat number. And don’t commit to a number first. The odds are split dead even here as towhether he’ll give you a price you can live with, or some wildly exaggerated number that iswritten on the wind and is absolutely impossible. Whatever it is, you want to hear it from himfirst.

Invariably, by the way, if a customer is not used to negotiating, or not practiced with it, he’ll saysomething like,

MR. CUSTOMER

Well, listen, Harry, what’s your best price onthis?

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This is a pretty good indication that Mr. Customer is inexperienced with negotiations, becauseto just ask what your best price is has little chance of determining what your best price is—youwouldn’t give it to him in response to a question like that.

But let’s say he does give you a price that you feel is doable. You’ll have to trial close here.

YOU

So, you’re saying that if I can do it at thatprice, you’ll want to take it today? (trial close)

To which, Mr. Customer might say,

MR. CUSTOMER

No, I didn’t say that! I’m just curious aboutwhat your best price is.

Or he might say,

Uh, yeah, I guess so. If you can do that, I willtake it.

Either way, what I like to do here is leave the room. Physically remove myself from the customer’spresence. I tell the customer that I want to see what the gallery has in the piece—what the gallerypaid for it—and I need to go and check our records to see how much room there is. (This isgenerally true, anyway. I can never remember what the gross margins are in a work of art, and Iwant to make sure that if I give away a certain discount, the gallery is not going to get hurt.)

But in addition, leaving the customer alone while you take a moment to see how much betteryou can do on the price, is a good way of establishing a little more dramatic tension to the situa-tion. The customer will continue to stare at the work of art, he may begin to mentally place it inhis home, he may fall in love with it a little more. And by the time you get back, it may haveoccured to Mr. Customer that you won’t have encouraging news.

I GIVE UP. . .YOU CAN BUY IT.

Okay, you’ve gotten what information you need and you’ve returned to the room. Let’s considera couple of scenarios.

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First, let’s say you have determined that the price he offered you is acceptable. The first thingyou do when you reenter the room is EXTEND YOUR HAND, grasp his and shake it firmlyand say,

YOU

Congratulations, Mr. Customer, you have

the work of art at that price!

You eliminate any possibility for further negotiations. The deal is done. He’s got you. Boy, is hetough!

Now one of two things is going to happen here. The customer is going to take your hand andshake it, or he isn’t. Despite what he told you about whether he would go ahead or not, that iswhat you do. Shake his hand. Or try to. Why? Because here again, you’re playing the odds. Ninetimes out of ten he’ll take it and the deal will be done—okay, that’s an exaggeration (maybe notnine out of ten), but a significant number of times to justify doing it as a matter of course.

If he takes your hand, congratualte him again, and begin writing the invoice. Now! Get the invoiceand start writing!

If he doesn’t, whatever he does now will be pretty important. Because, just like in the initial close,it will reveal his position. And the ball is now in his court.

HAVE I GOT A DEAL FOR YOU!

But now let’s say that you cannot get close to what he wanted on the price. (Or better, that youhave already decided not to discount at all!) And you’ve come up with an alternative proposal.How do you present it to him?

I feel the best option with customers like this is to acquiesce to their penchant to ask for dis-counts, by ‘throwing something into the deal.’

We used to have quite a few items in our merch mix in which we had long gross margins that wewould include in a deal like this ‘with our compliments.” The customers love that. They feel asthough they are ‘getting’ something, they’re dignity or ego is not diminished, you get the priceyou need for the art and everyone is happy.

Bear in mind, this is based on the assumption that you have already asked for the sale (a couple oftimes) AND given your discount deflection presentation. This would come at the end of that speech,with no beats or breaths in between. Just tagging it on.

That speech might sound something like this:

Mr. Customer, I just can’t. The publisher won’t allow us to negotiate prices (or the artist, or my wife or

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whatever). We love you and value your business AND we want you to have this, but my hands aretied. However, I noticed you had admired those little sculptures over there. How about if I include oneof those in the deal with our compliments? What do you say SHALL WE DO IT THAT WAY?(Closing again!!!)

See this thing about discounting is all about sales prowess.

ONE MORE THING

Just remember:

IF YOU GIVE ‘EM A DISCOUNT, MAKE SURE THEY TAKE IT!

The worse thing you can do is give someone a discount and let them leave without the art orframing. They’ll walk down the street thinking,

“Well, he rolled over pretty quickly on that. I wonder what the thing is REALLY worth?”

SO WHAT’S THEY BOTTOM LINE HERE?

As I see it, here are the arguments to discounting:

THE PRO’S OF DISCOUNTING

• You get a sale

• You get a sale you might not have gotten

• You increase your gross receipts and your above line number

• The competition does NOT get a sale

• You move inventory

• But wait, that’s not all you get....

THE CON’S OF DISCOUNTING

• You make a sale but no money

• The artist/publisher/supplier makes out but you don’t

• You get known as a company that will discount

• You have to raise your prices to include a decent margin after the discount and endup priced higher than the competition you were attempting to undercut in the first

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place

• You’re always hedging on pricing and charge different customers different prices forthe same merch, and what’s worse, SOMEONE FINDS OUT.

• You become the persona non grata in your circle of local business acquaintances

• You feel the fires of conservatory about how predatory and manipulative the artbusiness has become

• You dramatically foreshorten the life of your business

Some of the material for this Journal Report was excerpted from one of Todd’s five books, writtenexxclusively for the art & frmaing industry. If you found this material worthwhile, you’ll want toconsider these books along with the other reports. We are preparing the materials as CD and audiotape. Please inquire of the office if the media is ready for purchase. All of Todd’s materials are avail-able online at www.tbfa.com, or by calling us with our toll free number: 800/697-8935