The Perils of Discounting
15 December 09Has your mailbox been overflowing in recent months with sale catalogues? Having a sale can sound exciting, but what does it really mean for your business?
The four main reasons for discounting prices are:
You carry old stock and you want to move it
You need rapid cashflow (maybe the banks are on your back)
Sales are slow
Your prices may have been too high to start with
If you discount your prices, you need to sell a phenomenal amount more just to maintain your gross profit. For example: If you have a gross profit margin of 40%, and you have a discount of 5% - you need to sell 14.3% more to maintain that gross profit. If you discounted by 10%, you would need to sell 33.3% more! Discounting may offer some improvement in sales, but it rarely gets to the level where it is of benefit to your business.
On the other side of the coin – If you increased you price, how many sales would you need to lose before you became worse off? If your gross profit was 40% and you had a 2% price rise, you could lose 5% of your sales and still make the same gross profit. If you increased your prices by 6%, you would need to lose 13% (7 weeks trading). If your business had a small price increase, would you really lose that many customers? If you did lose some, they may be customers you really needed to lose. You know the ones – they always complain about price and take up a lot of your time. You may actually benefit from the additional capacity it provides to your business. Take the opportunity to win more customers of the type you like to work with.
Before discounting your price - think about what the discounting is doing to your business. It is giving the wrong message about the quality of your product or service? Should you train your staff to be better sales people instead? This would benefit your business on a continual basis. Talk to your accountant about what is the best option for your business. There is no point in working harder for less reward.
Jodie Thompson
Director
PJT Accountants & Business Advisors
p: 07 5413 9300