Having previously owned retail stores you may be surprised that discounting is something I’ve always been allergic to (unless it’s dead stock and needed to go). Of course this is a very easy way to secure a sale but what about all that lovely profit you’re giving away?
If your product has a profit margin of 30% and you or your staff give just 10% discount, you’re giving away a rather huge 33.3% of the available profit!
I have had competitors and known many business owners that actively (and some desperately!) discount to make the sale and get cash into the business. However whilst turnover is vanity always remember profit is sanity hence you must protect your price and your margins. Teach your team not to falter when a buyer insists on a lower price, if necessary just start negotiating and use tactics to hold firm on your prices and sell value….…perceived and real.
Imagine a company that sells widgets at £5,000 per unit and has a cost per unit of £3,500 giving a net profit of £1,500 on each. If twenty units are sold at the full price the net profit will be £30,000. Compare this with selling twenty units but this time at a discount of ten percent. The total selling price is then £90,000 however the net cost remains at £70,000. The net profit has therefore decreased to only £20,000 compared to the original transaction of £30,000 where no discount was given.
If this company continued to sell at ten percent discount they would then need to sell 30 units to achieve a net profit of £30,000.
So, lessons learned from this example:
- A ten percent discount means this company must sell 50% more units to earn the same profit.
- A ten percent discount means that the team has to work 50% harder to earn the company the same profit.
- By not giving discounts the company can essentially “work” 50% less and earn the same profit.
The automatic response to this is: “I hear what you’re saying but if I don’t give discounts I’ll lose sales” or “Yes, but if I don’t give discounts they’ll go to the competition”. Maybe they will and it’s possible you may lose a few sales BUT you can afford to, in fact your sales can drop by a third and you’ll still be making the same profit!
Remember the above example uses a 10% discount, imagine what larger reductions do to your bottom line? Grab a calculator and work it out.
Oh and do you really want customers who purchase solely on price anyway? Well that’s another story……