The discount trap

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The discount trap

Here Peter Hanley looks at The discount trap and how it affects your business and ongoing profit.

Discounting is expensive.

Discounting is expensive but just what does it cost you?

If you discount 15% and have a margin of 40% you need to sell  60% more product to have the same return.

you cut your prices by…

gross margin
20% 25% 30% 35% 40%
5% 33.30% 25.00% 20.00% 16.70% 14.30%
6% 42.90% 31.60% 25.00% 20.70% 17.60%
8% 66.70% 47.10% 36.40% 29.60% 25.00%
10% 100.00% 66.70% 50.00% 40.00% 33.30%
12% 150.00% 92.30% 66.70% 52.20% 42.90%
15% 300.00% 150.00% 100.00% 75.00% 60.00%

That is pretty terrifying and not often recognised. On top of that, your cost of sales increases with staff and extras along the way.

A lot of Food outlets are getting hurt by the home delivery people by having to compete. They the home deliverers take around 35% margin on every sale leaving little for the owner.

Online competition is affecting many businesses at cheaper prices and free delivery. However, it is only part of the market so you can still have the other part of the customer group or even join them and sell online.

Competing on discount is a no-win situation

The discount trap

First of all, there are times to discount.

I use for example when you want to quit slow moving stock or obsolete stock that is not turning over. Get money back to put into faster moving products.

Drawcard products
The discount trap

Discount a special product to bring customers into your premises. You will see the majors do this with a special line at a reduced price when everything else remains at full price.

Out of season products.

Sometimes it is better to clear cash than have the stock sitting around for 6 months waiting for the sun to shine again.

Customers play the discount game.

When you have regular discounts your customer memory kicks in. I will wait for the spring sale, The Black Friday sale, whatever the sale, at a regular period is. They shop for bargains but they buy for personal reasons, brand, Image, how they feel etc

Every time you discount, your bottom line is hurt.

This is a fact of life and when you look at your margin at the end of a period you wonder why the drop.

So how does the Cashback system overcome this problem?

First of all, you limit the discount to under 10% or a price that suits you. It is consistent and not open to negotiations when dealing with the customer.

The discount trap

Next, not everyone will use Cashback or even be offered a discount so you average the discount down.
People love a deal and cash is always king but not everyone will be a participant.

The discount trap

It is not only about discount it is also about loyalty and you are buying customers to bring them back time and time again. Marketing is expensive and this is a minimal cost outlay that will last forever.

You are banking your future. The loyalty cash is held for you to draw down on at any time the customer spends with you. This is building a credible asset, not a lasting liability.

Dragging new customers in the door is a real bonus and costs you almost nothing. This can continue for years into the future and help you build lifetime customers.

Last of all is knowing everything about your customer. Where they came from, where they live everything you need to know for future marketing.

In conclusion

The Cashback system offers value for the merchant and the customer in a Win-Win situation. This puts your business in front of your competitors and shows that you care.

If you want to know more contact me at phanley@cashbackliving.com.au

The discount trapPeter Hanley
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