The Dangers of Discounting

The Dangers of Discounting

Now it’s quite scary to see that most business owners learn how to discount before they learn how to count. And it’s not surprising. When you look at all the big retailers you see big New Year’s sales and winter sales and summer sales. They always seem to have a sale on. And it’s okay to discount if you know why you’re discounting, if you've got a purpose to your discount.

 

And there are a few reasons you would. Before I go into any of the reasons why you should put your prices up, I'm going to go through the reasons why you might discount.

   

The first reason is because you've got some old stock. If you've got some old stock you need to get rid of and it’s sitting on your shelves in the stockroom, or taking up warehouse space, or it’s going to go out of date, or it’s going to go out of fashion, of course discount it. Get rid of it. I would say do your best to at least recoup your costs. So don’t discount it any lower than your cost price, sell it on and move it on.

 

The second reason you might discount is if you urgently need some cash. Let’s say that you’ve got an opportunity and you need some cash to buy something. Or maybe things have gone a little bit south for you and your sales haven’t been what you thought they were going to be and you need to urgently get some cash in. You can discount to fill the bank account up with money. Remember, that’s quite a dangerous strategy if you’re doing it all the time, but if you needed cash urgently you could do it.

   

The third reason you discount would be for marketing. So for example, if you knew that you could get a new customer by dropping your price down a little bit, and you could use that as part of your acquisition cost. As long as you can get that customer paying full price after that first purchase, then the hit you take on your first purchase is worth your while. It helps you to get a new customer.

   

So those are the three reasons where it’s ok to discount. Otherwise, it’s not a good idea to discount at all. Discounting is just as good as taking your money and giving it to someone else.

   

It’s very important that you have a USP before you charge more than your competitors. For most of you, 90% of the time you can put your prices up any ways, because you’re probably too cheap as it is. And yes, you will lose some customers. What sort of customers are you going to lose? Probably the type of customers that you don’t even want to deal with. The ones that whine and moan all the time, they’re hard to look after, they don't pay their bills and they are price sensitive. Is that the sort of customer that you want? I certainly don’t want to deal with those people. I want to deal with people that are prepared to pay for a premium service.

   

So let’s say I put my price up by 10%. My original price was $100 so my new price is $110. I'm now making $30 gross profit. So how many customers can I afford to lose? I can afford to lose 33% of my customers, and I'll still make the same amount of gross profit! Yet I'll do a third less, I'll hire a third less, I'll fulfil a third less, order a third less, I'll be a third less busy. And that’s just by putting my prices up by 10%. So you've got to say to yourself, “if I was to put my price up by 10%, would I lose a third of my customers?” Very few businesses would be able to say “yes” they would lose a third of their customers.

   

So that’s why discounting is dangerous and increasing your prices is a great strategy for increasing the profit in your business. Put your prices up and add value. Your customers will feel like they’re getting more for their money and they’re going to be willing to pay a little bit more.

       

About the Author

 

Ben Fewtrell is a sought-after Business Coach, Keynote Speaker and trainer who has featured in Virgin’s Inflight Magazine and Entertainment Portal, SKY Business and “Secrets of Top Business Builders Exposed”. He is also the host of the popular Business Brain Food Podcast where he interviews leading experts on anything and everything business.

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