Dangerous Discounting

It seems that everyone is focused on price. It seems that everyone wants a deal.

The larger retailers spend a ton of money promoting in the media and it would seem that because of this we are all required to do the same. You’ll hear them say, “Don’t worry, we’ll make it up on volume.” Don’t be fooled by this. The fact of the matter is that most businesses on average return about 10 percent on sales before tax. This means that after deducting the cost of the goods or services sold and all expenses incurred in running the business, there is 10 percent of the original sale price left as your profit. So if you discount say by 10 percent then the 10 percent you are giving away is the same 10 percent you would have made in profit. So typically, a 10 percent discount will leave you with no profit. Here is another example to demonstrate the dangers of discounting. If your present gross margin is 30 percent and you give a 10 percent discount, you need to increase your turnover by 50 percent to make the same amount of profit.

Discounting is not always bad.  If you have obsolete or seasonal stock or specific cash flow requirements this can be used as a specific strategy, however, there should be specific cut-off points when using these strategies.  When planning the profit for a particular product be sure to calculate how much you plan to sell at full price and how much you plan to sell at a discounted price for the lifetime for the particular product. Many smaller retailers will discount because their competitors are and not really consider what it might be costing them.

One of the main reasons small businesses discount is to acquire customers.  It is far more profitable to work out some clever marketing strategies than to discount for this reason. In reality, experience shows that most customers attracted to a business through discounting, rarely if ever comes back again. Discounting in business should be dealt with very carefully.  Because it is so prevalant, business owners get trapped into thinking that it is a legitimate and profitable strategy and are often the worst offenders within an organization. Clearly there is more to it than meets the eye and it should be used with eyes wide open.

YOUR CHALLENGE: The next time you are inclined to discount, stop and review the profit margin and look for other marketing strategies that will create the same effect without impacting your bottom line.

If you would like to learn more about how this might apply to your business, let’s talk:

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