Last week we looked at adding value instead of giving discounts to increase your client base and revenue. Today, we give you the cold hard facts about how discounting can effect your bottom line….
We live in a material world, and I am a material girl (or boy) – provided we can get the best deal. It’s all about the dollars, and the most popular question “How much is it?” The bigger retail organisations spend huge dollars on promoting their sales through the media and it would seem to the ordinary businessman that this is the way to conduct business. “We’ll make it up with quantity” you hear them say. Meanwhile the ‘Grim Reaper of Business’ is sharpening his scythe.
Most businesses on average return about 10% on sales before tax. This means that after deducting the cost of the goods or services sold and all expenses incurred in running the business, there is 10% of the original sale price left as your profit.
So if you discount say, a little old 10%, then the 10% you are giving away is the SAME 10% you would have made in profit. So typically, a 10% discount will leave you with NO profit.
Scary thought? I hope so.
Lets put this into perspective, if your present net margin is 30% (average), and you give a 10% discount, you need to increase your turnover by 50% to make the same amount of profit. Now, for the average Joe, 10% isn’t enough of a discount to get them off the couch, 20% off is good, 50% is pretty attractive, and hey if you can increase your turnover by at least 200% then go for it!
There are some good reasons to discount, such as end of line or seasonal stock or specific loss-leader requirements. But there should always be specific cut-off points for these strategies.
The big guys look at things slightly differently. Often they will work out how much of a particular product they will sell at full price and at a discounted price for the lifetime for that particular product. So factored into the profit for a particular product is the fact that there will be some discounting. Most small retailers will discount because they’re ‘keeping up with the Jones’, and don’t really look at what it might be costing them.
One of the main reasons small businesses discount is to gain customers. (Grim is smiling now) It’s far more profitable to work out some clever marketing strategies that add value rather than to discount for this reason. In reality, experience shows that most customers attracted to a business through discounting, rarely if ever come back again. So the payoff in marketing is to acquire the lifetime value of that customer not a single purchase.
Discounting in business can be dangerous, because it is so common, small business owners get trapped into thinking that it is a legitimate and profitable strategy. Give death the cold shoulder and thoroughly consider the impact before use.
For more financial advice, contact Tradies Accountant today.