Cashflow Tips – To Discount or ADD VALUE?
There are many businesses that offer discounts – especially at the “sales” times. Many businesses haven’t stopped to think – to discount or Add Value, and attempt to gain market share by sales and discount prices. The problem is many don’t realise that to maintain the usual gross profit margin (something many small business do not know what theirs is) will mean they have far too much to make-up and risk that the client will expect you to always keep your prices that low. This is how a business can end up going broke!
Generally, consider also that most people believe they get what they pay for.
The following table shows what increase in sales are required to compensate for a price discount. For example, if your gross margin is 20% and you reduce prices by 10% you need sales volume to increase 100% or to DOUBLE to maintain your profit! It is not common that such a strategy has worked in the past and is only best left for big businesses who can afford it!
Think of the “25% Sale” or “Half-price sale” which can harm your current business and your future reputation with your customers. If you are selling a product or service with a margin of 40% – a “25% Sale” will require you to increase sales volume by a staggering 167% just to maintain the same profitability! Consider – is a “25% Sale” going to generate a long-term increase of 167%?
Tip 1 – Only consider large discounting for securing long-term contract sales, or to liquidate out-dated stock.
Tip 2 – Can you offer a cheap but high perceived-value item instead of a discount – “I’ll also throw in…”
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February 19, 2014 at 10:05 pm
This is a fantastic post! A lot of businesses, particularly the small ones, offer a lot of discounts and regular sales. Some often do this every few weeks to keep flowing. It is understandable that at the time of the discount, the long term picture isn’t thought off but I couldn’t agree more- a business can become so dependent on this in order to get sales that they fail to realise they aren’t hitting their targets!
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February 21, 2014 at 9:14 am
You are absolutely right! We appreciate your affirmations and elaborating on the common falicy small business fall into – offer a special to attract sales! NOt Good! Thanks for commenting
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