As you probably know, a deep discount can act as a powerful draw for old and new customers alike. Consumers love a “deal” – they love it when they can get more for less. They especially love it, when they can get the same product for less than others have paid for it, or less than other companies are offering it for. So, a lot of business owners rely on the power of discounting to get people into their business and to convert prospects.
They use discounts in their headlines, powerful offers, promotions and guarantees.
While there’s nothing wrong with this, I find that it’s a lazy strategy. Instead of creating an offer specific for a target market, they slash some of their prices and wait for the drove of customers to come flying through the door. The problem with that is, the pain it causes to their bottom line.
Discounting is often an ineffective strategy because it offers too little – if any – return on investment. It also draws discount customers who many never actually pay full price – an unprofitable customer.
Discounting could be hurting your bottom line more than you know.
How often do you run the numbers before you run a discount promotion? Is the discount based on your profit margins, or a figure you pulled out of the top of your head? Like every other strategy you implement, you need to be making more money than you spend, and when you discount, you spend some of your profit margin.
Discounting can also impact your business beyond the price of the product itself. There are greater potential consequences that you may not be aware of. The danger is that you actually begin to train your customers to expect a discount.
Here’s six ways discounting can hurt your business:
- Discounting makes you less money than you think (see the examples below).
- Discounting attracts the wrong customers, if you attract customers based on price rather than value, you can only get them coming back by offering more discounts.
- Discounting affects the way your customers see your business. Do you really want to be seen as ‘cheap and cheerful’?
- Discounting can create a price war. Are you assuming that your competitors won’t react to your lower prices?
- Discounting eats into your profit margins, a lot more than you realise (see example below).
- Discounting can cause customers to wait for reduced prices. We’ve all done it, “I’ll wait for the sale before I make that purchase”!
I usually advise my clients to consider all other options before diving into a discount strategy. Often, there are other more profitable ways to achieve the same objectives. Discounting works because customers feel they are getting more value for less money. However, there are many ways to increase the value/price ratio of a product without decreasing its price, such as product/service widgets and bonus offers.
Let’s take a look at discounting by running some numbers.
Ultimately, business owners look to discounting to help boost income. More people in the door, more sales, more money, right? Not so fast. Depending on the discount, you could be working really hard just to maintain the sales status quo at your business.
Here’s a really basic online calculator that you can use to compare discount strategies:
http://www.calculatenow.biz/business/discount.html
For example, let’s take a look at a simple 10% discount.
Let’s say my average monthly sales are 250 of a product that sells at £400, so my total revenue is £100,000 and my product costs run at about £250 per product, so my total costs of sales is £25,000. I have operational costs at £10,000, therefore my usual net profit is £65,000, which is a pretty good profit margin.
In this example, I’ll choose to discount my offering by 10% in a month and sales volumes stayed level.
- My sales revenue would come in at £90,000
- Net profit would now be £55,000 after costs – a 15.4% decrease.
To maintain my sales of £100,000 per month, I would now have to sell 278 units up from 250 or an increase in volume of over 10%. Therefore, to increase total revenue by 10%, I’d have to see an increase of 20%, selling 305 units. This assumes that there is no other increased cost from the additional volume.
If the Net profit margin was a more common 30%, the same 10% discount would reduce net profit by 33%. To show you how this works. £100,000 – costs of £70,000 = £30,000 net profit. Now apply the 10% discount, sales are now £90,000 – cost of £70,000 = £20,000 net profit or a fall of 33%.
Also note that these simple calculations don’t include any increases in costs, which are likely if your sales volume increases. Normally, a change in sales will cause a change in wages and overheads, for example, staff may need to work different hours or the accounting cost may change. Sales will need to change further to compensate.
So, discounting can demand some pretty impressive increases in sales before it can start making you money. Why would you work harder for no reward?
Discounting impacts perceived quality – of your product, service and of your business.
Giving your customers a discount might seem like the right thing to do – especially in tough economic times when you really need to bring people in the door. You’re searching for a way to increase sales and generate new leads. The competition is fierce, and a lower price seems like the only way to stay in the game. Like I said above, people love bargains. They like getting more for their investment. When the price is discounted, you run the risk of giving the impression that the product or service is out of date, of a low quality, or undesirable by others.
When a customer is looking for quality, they’re prepared to pay a higher price, and often make their decision based on price when looking at a range of comparable items. Especially when it comes to luxury goods.
If you have a customer base with a high average income, who shop in your store for the quality of your offering, you may not have much to gain with a discount strategy.
So, can you use discounting as a marketing strategy and still make money?
The answer here is yes, and no. I’m not trying to say that you should never discount. It’s a matter of HOW and WHEN you discount. You need to discount with knowledge of your numbers, instead of a short-sighted desire to get customers and close sales.
I mean, even luxury retailers discount their products. Think about Gucci, which offers discounted merchandise at the end of each season through their customer emails. However, the offer of a discount is a marketing strategy designed to:-
a) move old product, and
b) appeal to a particular segment of their market.
This is the group of people who would not otherwise afford or be willing to buy their merchandise. Their core clientele would not be won over with discounts, since their interest lies in the quality and prestige of the brand. In this case, discounting is a highly effective strategy for a company that can afford to discount. Luxury goods generally have a high-markup or profit margin, and can stand to take a cut on last season’s lines.
So now you know why you need to think really hard before cutting your prices. If you want to know how I can help with your pricing strategy why not book a 30 minute exploratory call with me. Just pop on to this link to access my calendar. https://www.johnolivant.com/book-meeting-online/
Twelve intensive half-day meetings.
