What is the Effect of Discounting on Your Business?

What is the Effect of Discounting on Your Business?

Given the current circumstances, we thought we should quickly give you a short understanding of the effects that discounting your products or services can have on your business.

There are a few reasons why you should or shouldn’t discount, and everyone has their own different opinion on this topic. I thought we should look at the reasons why during this current climate you may choose to discount. And then I will explain the effect that discounting has on your business. Below I will discuss the three main reasons for discounting.

Cash Flow

One reason why you would definitely discount right now is for cash flow reasons. There is no denying that there has been a definite decline in sales in the past few months. So… If you wanted to increase the amount f cash in your bank right now, you might opt to discount your products or services. You may have noticed this happening quite a lot recently, for example, retail stores having mega sales on all of their stock at cost price. Now… this is ok. If it is purely just to fill the bank up with money. If you have products that aren’t selling due to COVID-19, they are useless to you sitting on a shelf or gathering dust in a stock room. If you can turn these products back into cash to pay your bills, then I am ok with that.

Moving Old Stock

A second reason why you may choose to discount is to move old stock. If you have a product that is out of season or is no longer relevant, you may want to get rid of it. if this is the case you might discount it to do so.

Lead Generation

The third reason is a marketing lead generation strategy. You may have previously heard of the term loss leader. You could sell a certain product at a lower price just to get people in to sell them other products or services. Now… there is a potential danger in implementing this strategy, you need to ask yourself, “If I’m Marketing my product or service at a deeply discounted price, what sort of customer am I attracting?” Basically, you have to decide if you want this type of customer long term or not, or if they can be coaxed into buying something else. This is something that you have to think about for yourself. Make sure to ask yourself those questions.

What Discounting Does To Your Margins

Let’s take a look at what discounting does to your margins. Every business is geared to make money, that’s how it is! Let’s say we sell a product for $100, and this product costs us $80. We make $20 profit on that product. Pretty straightforward right?

Now if I decide to ad a 10% discount onto this product, I am now selling it for $90, if it still costs $80, I am then reducing my profit down to $10. Think of it this way, that is a 50% decrease in my profit on each unit. So I have to sell twice as many units, just to make the same amount of profit. This is why you have got to carefully consider the implications that discounting can have on before you decide on doing it.

The likelihood of doubling your sales by this discount may be there, but it also may not be there. It is up to you to find that out for yourself. It depends on the marketplace and the type of people that buy it, this is something that only you can work out. If you’re looking at a way to increase your profitability, you’re probably better off not doing it.

Now…What if you put your price up by 10%? “Why would I do that?”… What would happen? So we are now charging $110 for our product, but it’s still costing us 80, but we are now making 30% profit on each unit. How many customers can I afford to lose and still maintain the same amount of profit as when I was selling the product at $100? The answer is one third or 33%. I can have a 33% decrease in my sales, but I can still make the same amount of profit.

If you’re increasing the price, you may have to add value. This added value might increase the cost, for example $80 may become $85. For a lead generation strategy, it is better to add value, let’s say something costs you $5, but the perceived value to the customer is $20, you’re still better off. It costs you $5 to deliver and you’re still making $25 profit. You could even increase your selling price by the $5 it cost you and still make the same amount of money.

One thing that you really need to know in your own business is what your margin is. You need to work out what happens if you put your sales prices up, how many sales you can lose when you increase your price. Once you have done this, you will know if it is the right time to consider discounting or not

As you know these are strange and unprecedented times. If you need cash and don’t have any, you may have to liquefy your stock, that’s just how it is. If I had inventory that was not moving due to a loss in buyer confidence, I wouldn’t have any problem in selling it at a discounted price to get rid of it. If I knew it would help to pay my bills, I wouldn’t hesitate to do it. but I would not do it for any other reason, unless it is old stock I would not discount it. I hope this article has helped to give you an insight into discounting and when it is appropriate to discount, thanks for reading!

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