The discount trap

Here Peter Hanley looks at The discount trap and how it affects your business and ongoing profit. Your target is a good margin.

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 products to have the same return.

you cut your prices by…	gross margin
you cut your prices by…	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 recognized. 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. The home deliverers take around a 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

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.

How a black Friday special saved me

I have paid a price for a Video program every month for four years us$47. It was a bit steep but good value.
During this discount period, they offered a Black Friday special at us$29. Now that is a us$18 difference of $216 a year.

I contacted the company and simply stated change me or lose me. They canceled my service for me and I then reapplied at the new rate and I retained all my history. Great customer service and I left wondering why I had not done it years ago.

In conclusion

Discounting increases sales however is it at the cost of disappearing margins and hence net profit. People still buy on value or companies like Apple would be out of business.
In fact, it has been tested that if you offer a similar product at a high and low price most people will pay more expecting a problem.