We live in a price-focused world–everyone is out to get the best deal.
The bigger retail organizations spend big dollars on promoting their sales through the media, and it might seem to the ordinary businessman that this is how to conduct business. "We'll make it up on the volume," you hear them say.
Don't be fooled by this.
The fact of the matter is that most businesses, on average, return about 10 percent on purchases before tax. Thus, after deducting the cost of the goods or services sold and all expenses incurred in running the business, your profit is just 10 percent of the original selling price.
So, if you discount your product or service by 10 percent for the promotional sale, the 10 percent you are giving away in the promo is the same 10 percent you would have made in profit. So, a 10 percent discount leaves you with no profit at all.
The table at the bottom of page illustrates the impact of discounting. For example, if your present gross margin is 30 percent and you give a 10 percent discount, you need to increase your sales quantity by 50 percent to make the same amount of profit.
There are some good and legitimate reasons to discount, such as obsolete or seasonal stock or specific cash flow requirements. However, you should have specific cut-off points for these strategies.
The big chains look at things slightly differently. Often, they work out how much of a particular product to sell at full price and how much to sell at a discounted price for the lifetime of that particular product.
So, factored into the profit for a particular product is the expectation that there will be some discounting. Most small retailers discount because their competitors are doing that and do not really consider what it might be costing them.
One of the main reasons small businesses discount is to acquire customers. It is invariably far more profitable to work out some clever marketing strategies than to discount to draw in customers.
In reality, experience shows that most customers attracted to a business through discounting, rarely come back again, especially after prices go back to the normal level.
ActionCOACH clients can attest: The payoff in marketing is to acquire the lifetime value of that customer rather than a single purchase.
Deal with discounting in business very carefully. Because it is so prevalent, small business owners get trapped into thinking that cutting prices for a sale is a legitimate and profitable strategy.
Clearly discounting is tricky area, and you need to consider it thoroughly before doing it.
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