There is always the temptation to reduce prices when sales are a bit sluggish. It is one of the most over used marketing strategies around, and it can be a recipe for disaster. What many people don’t understand is the volume of sales that is required to recoup the discount given away.
Here are some statistics that may surprise you. If your present gross profit is 20% and you cut your prices by 10%, you will need to increase your sales by 100% just to break even on the discount. It is even worse the lower your gross margin. If we use a gross margin of 15%, you will need to increase your sales by a staggering 200% to break even.
I’m not saying there is not a place for discounting. Discounting can be an effective strategy, but careful planning is required before it is undertaken, especially if generating more cash flow is your objective. Remember that increased sales are only one measure of business success, if it negatively impacts profit it may not be the way to go. To successfully use discounting, it is important you understand all its implications including profitability and cash flow.
Discounting can be used effectively to clear slow moving or seasonal stock but be careful to not discount stock that can be easily sold at full price. It can also be used to encourage customers to your business in the expectation that they will buy more than just the discounted item. Discounting can also be used to drive loyalty with regular customers, discounting an item to drive long term multiple sales can be effective.
If you do decide to use discounting as a marketing strategy it is vital that you stick to your game plan, discounting only the designated items, and for the period you originally intended. Just as important is to review the results at the end of the campaign. Did the strategy achieve what was originally planned? What did you learn? What would you do differently next time?