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What is the real cost of discounting?

There are Christmas sales, Boxing Day sales, New Year sales,Easter sales, back to school sales, EOFY Sales. Great if you’re the buyer but should you offer discounts in your business?

 

It doesn’t matter if you are a retail shop or a business providing services the impact is still the same.  Consider this:

1.      You sell your product or service normally for$100

2.      Your cost for that product or service is $75

3.      You therefore make $25 gross profit on selling that product or service

If you decide to do a 5% discount your sell price goes down to $95 but your cost stays the same.  So now your profit is only $20 not $25.  In real terms the 5% discount has actually resulted in a 20% reduction in profit.

 

In the above scenario we lost $5 straight off of the profit by going from $25 down to $20.  If we were going to sell 100 of those products regardless of the sale then our total profit would have been $2500 (100 x $25) if we didn’t discount.  Since we did discount, we have now only profited $2000 (100 x $20) on those guaranteed sales.  That means the extra sales from the discounting needs to deliver at least another $500 in profit in order to put us in front.  At those numbers that means we need to sell 25% more of the product or service then we would have otherwise to justify a 5% discount.

 

Pretty scary when you realise just how much extra you need to achieve to justify the discount.  Here is a quick reference table you can use to work out how much extra sales you need to do based on the discount you offer. Note if there isn’t a % in a box above it means you can’t physically recover the cost of the discount.

So why do businesses discount?  Often it is to get increased sales but if that is your strategy then make sure you know how much extra in sales you need to achieve for you to be in front overall.

If you don’t need to discount then don’t.  Keep discounting for products or services that are slow or hard to move at full price (i.e. old stock or unsupervised trainee labour).  If you want to run a promotion then talk to your supplier to see about getting discounts off of them that you can pass onto your customer rather than trying to absorb it in your profit.

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