by Dr Greg Chapman
Everyone (including me) says discounting is a bad idea if you are using it as a way to increase gross profit through sales volume. For example, if your gross profit is 30% and you offer a 20% discount, you will have to double your sales, just to break even. It also creates a reputation for your business that your prices are negotiable. Not a great strategy.
Most people discount when they see their stock just sitting on the shelves and then they panic, but what if you planned to discount from the start. What might such a plan look like?
Let’s say the product cost you $30. Keeping the arithmetic simple, you decide to sell it at $100, a 70% margin. You don’t expect to sell many at this price, perhaps 10% of your overall sales. Next you decide to announce a 15% discount to your customers as part of a ‘mid season’ sale. You expect to sell 30% of your stock at this price. Remember, by having priced it at $100 initially, the 15% discount seems like good value, with the initial price being an anchor point.
Finally, you offer the product at your ‘end of season’ sale at a massive 40% off where you expect to clear the remainder. Of course at this price, you still have a 50% margin and over the whole season, you have achieved a 58% margin.
Does this strategy create a reputation as a discounter? Not if there are ‘good reasons’ for the discounting which don’t include ‘you can’t pay your bills’. Such reasons might include a new model or end of financial year sales.
The discounted value is relative to the significantly higher initial price that you set as a reference point. Your focus is on achieving the average price target you have set, and discounting is the tool you use to achieve it!
The Small Business Success Club provides a complete and an easily affordable toolkit which enables you to uncover the root causes of your ‘Cashflow Problem’ and come up with your own solutions if yours is a new or young business, or alternatively request a Complimentary Business Evaluation from me and we can diagnose the problem together.
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Dr Greg Chapman is the Director of Empower Business Solutions and is Australia's Lea ding Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems. He is also the author of The Five Pillars of Guaranteed Business Success and Price: How You Can Charge More Without Losing Sales.
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