The Dangers of Discounting

A common misconception is that, when sales are falling, a great strategy to avoid the sales decrease is to offer a discount.  The reality is actually the opposite; you can often be more profitable by holding your price and accepting the reduction in sales volume.

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Consider the example below: If sales are currently at 10,000 units per annum at $100 and your costs are $60 per unit then your gross profit is $400,000.  If you offer a discount and this means sales remain constant at 10,000, you’ll only achieve $900,000 in sales so $300,000 gross profit.

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If instead you accept the 10% drop in sales but hold your price at $100 per unit you’ll still only make $900,000 in sales but you’ll only have to pay for 9,000 units.  So your gross profit will be $360,000.  In other words a $40,000 reduction in gross profit compared to a $100,000 reduction if you offer a discount.

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If we look at this another way and see how much sales need to increase by to maintain our original gross profit of $400,000 if we offer a 10% discount:

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Instead of having to sell 10,000 units per annum we now have to sell 13,333 – a third more!

Discounting is simply not the answer – it’s a race to the bottom.  Look at all other alternatives starting with what you can do to delight your clients so they’ll keep coming back.

discounts

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