Discounting if used properly can be an effective strategy to increase profitability and cash flow, but if not used properly it can cause serious consequences to the growth and profitability of your business.
Most of the time discounting is a gut reaction to a slowdown in business. Businesses find it easier to discount the value of their product than to sell on value. One of the biggest negative consequences of discounting is that we are training our clients to buy only on sale. This can have a big affect on our bottom line. I’m not really sure a business understands how much more they have to sell just to stay at that same profit level.
For Example if you have a…
- 30% margin
- You discount your product or service 10%
- You will have to sell 50% more to make the same amount of money.
Contrast that with…
- If your margins are 30%
- You increase your prices by 10%
- You can sell 25% less and still make the same amount of money.
Now isn’t that interesting…
Discounting is an appropriate strategy if your inventory is high and you need cash to pay bills or if it’s a perishable item that you will have to throw away. However instead of just discounting your product, use it as an incentive for your customers to purchase more.
Let’s assume you have a product that costs you $5.00 and you sell it for $10.00. If you were to have a sale of 25% off, you would now be selling it for $7.50 and only making $2.50 instead of $5.00.
Instead of discounting the full price you can have a buy one get the 2nd item at ½ price. Now you’ll at least be making the same $-profit if you sold 1 at full price. Another option is a buy 3 get the 4th free. You are in essence still providing a 25% discount but you are now making $10.00 profit per sale instead of just $5.00 if you sold just 1 item.
The advantage here is that you are moving more inventory and turning it back into cash.
When it comes to marketing, “perception is reality”. If you have a 25% off sale you become labeled as a discounter. If you have a buy 3 get the 4th for free sale, or buy 1 and get the 2nd item at ½ price, you now are perceived as a place where you get more for your money. You are now distinguishing your business from your competition by providing adding value to your customers instead of being viewed as just another discounter.