The Real Impact of Discounting

The REAL Impact of Discounting

One of the most common questions you will receive is “How much will it cost me?”

The big retail organisations spend huge dollars on promoting their discount sales through the media and it would seem to the small business owner that this is a standard business practice.

Meanwhile the big retailers are often using this to reduce excess stock or as a loss leader, to encourage additional sales with a healthy profit margin.

Most businesses on average return about 10% 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 about 10% of the original sale price left as your profit.

So if you discount, say a little old 10% then the 10% you are giving away is the SAME 10% you would have made in profit.

A 10% discount may actually leave you with NO profit despite the time & resources you have invested. Scary thought…hey?

Let’s put this into perspective, if your present gross margin is 30% (average), and you give a 10% discount, you need to increase your turnover by 50% to make the same amount of profit. Now if you’re like the average Joe, 10% isn’t enough of a discount to get them off the couch, 20% off is good, 50% is very attractive, and hey if you can increase your turnover by at least 200% then go for it.

There are some good reasons to discount, such as end of line or seasonal stock or specific cash flow requirements. But there should always be specific cut-off points for these strategies.

One of the main reasons small businesses discount is to gain customers. It’s far more profitable to work out some clever marketing strategies that add value to your offering, rather than to discount for this reason. In reality, experience shows that most customers attracted to a business through discounting are rarely repeat customers. These price sensitive customers are also unlikely to fit your definition of an ideal customer. Review the discount table and consider your reasoning before applying a discount to convert a quote.

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