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Cashflow tip - Discounting Strategy Effectiveness – Or is it better to ADD VALUE? And 2 tips to do it better!
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Published on Thursday, 10 November 2016 16:05
t is very common for many businesses to offer discounts – especially at the “sales” times – it’s easy to copy what Big Business does! But the Discounting Strategy Effectiveness and its effects on Cashflow is what many businesses haven’t stopped to understand – to discount or is it better to Add Value, in an attempt to gain market share by sales and discount prices. The problem is many don’t realise that to maintain the usual gross profit margin ( which is something many small business do not know what theirs is) will mean they have far too much to make-up the lost income and risk that the client will expect you to always keep your prices that low. This is how a business can end up going broke!
Consider also that most people believe they get what they pay for.
The following table shows what increase in sales are required to compensate for a price discount. For example, if your gross margin is 20% and you reduce prices by 10% you need sales volume to increase 100% (or to DOUBLE) to maintain your profit! It is not common that such a strategy has worked in the past and is only best left for Big businesses who can afford it!
Think of the “25% Sale” or “Half-price sale” which can harm your current business and your future reputation with your customers. If you are selling a product or service with a margin of 40% - a “25% Sale” will require you to increase sales volume by a staggering 167% just to maintain the same profitability! Consider this – is a “25% Sale” going to generate a long-term increase of 167% in sales?
Tip 1 - Only consider large discounting for securing long-term contract sales, or to liquidate out-dated stock.
Tip 2 – Can you offer a cheap but high perceived-value item instead of a discount – “I’ll also throw in…”
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