Walk through any shopping Mall on any given day and chances are you’ll find that every second business is having a sale happening in one form or another. In many respects, one could be forgiven for thinking that a lot of businesses simply wouldn’t do any business at all if they weren’t having a sale or discounting something.
On the other hand, I think it’s also fair to say that many shoppers are reluctant to buy anything unless they are, or at least feel they are, getting a discount, a saving or a bargain. In fact, saving money is so important to some shoppers that quite often when they buy something, they’re more inclined to tell you how much they saved before they tell you how much they paid for something.
These trends now see a lot of businesses offering more discounts or running more sales, just to keep up with shopper’s demands. One can’t really blame them for discounting when so many people seem reluctant to pay full or normal price for items in these modern and very competitive times.
The problem with discounting however, is that it could be impacting on your business in ways that are not really helpful. Even giving what by today’s standards may today be considered a small 10% discount, can add huge pressure to your business bottom line. Let me explain –
Eg. Let’s say you sell lawnmowers and each mower costs you to buy say $300 and you sell them for $400. Your profit is therefore $100 or 25% of the sale price.
If you sell 10 mowers your overall profit is $1000.
If however, you offer the mowers at 10% discount, your retail price therefore drops to $360, in turn your profit drops to $60 or around 16% of the sale price. If you sell 10 mowers, your overall profit drops to $600.
In other words to make your original $1000 profit, you are going to have to sell more than 16 mowers at 10% off to make the same profit. Of course offering 10% off may get those 6 extra sales, or even more, but that’s always a gamble.
Another consideration is how GST may impact on these numbers as well. For this simple example, I haven’t considered any GST impact.
Discounting is very much a part of doing business these days but it’s not all it’s cracked up to be. I would encourage you to exhaust other ways of tantalising customers before resorting to discounting.
One option is to ‘value add’ rather than discount. In other words, rather than discount, see if you can add a bonus opportunity of some sort.
By adding value or a bonus, you won’t be reducing your sale price at all and depending on how you do it, the impact on your profit margin will be less dramatic as well, and your customer will still feel 10% better off.
Let’s use the lawnmower example again.
Instead of offering a 10% discount, offer a $40 bonus pack instead.
You could say with each mower sold, you’ll receive a fuel tin, a pair of safety glasses and a pair of safety ear muffs and possibly a leaf rake.
Of course this is just an example of what could be done but what’s more important to note is that items like those I’ve suggested, that is accessories, generally have far greater profit margins than say bigger items like a lawnmower. It’s very possible that the four items I mentioned could retail for $40 in total, yet your purchase cost could be as little as half or less than that, let’s say it’s $20. On that and while talking about spare parts or accessories, we all know that if you bought all the parts that went into a $30,000 car separately, the cost could be $100,000 or more.
Sell 10 x $400 mowers at 10% discount and you’ll turnover $3600 and make a profit of $600.
Sell 10 x $400 mowers and throw in a $40 bonus pack for each and you’ll turnover $4000 and your profit margin will be the full $1000 less the cost of the Bonus packs (say $200), in other words $800 net.
Your customers are still getting a 10% bonus but to provide it, your cost is now nearer $20 than $40.
$800 is better than $600 any day and all it takes is a little imagination.
So you’re not a lawnmower retailer?
This same principle can be applied to almost any business. Here are a few thought-provokers –
A takeaway food outlet could offer a large serve of chips with orders over $20.
A hair or beauty salon could offer a take home product as a bonus. Your product suppliers may provide you with product at the right price for such a promotion.
A clothing, shoe or gift shop could offer a bonus $20 gift card with purchases over $200. The gift card is of course is to be spent at the shop giving it and there’s every chance the customer will spend considerably more when they come back to use it. If they don’t use it, nothing is lost.
A butcher shop could offer 2 loaves of bread with any purchase over $30. To do this it’s simply a case of arranging with a nearby bakery to purchase a series of gift vouchers for 2 loaves of bread. Chances are the bakery sells the bread for around $2 a loaf and you’d be able to purchase the gift vouchers from them for half that. It’ll also drive people to the bakery and that could lead to greater sales. An enterprising butcher would also arrange a reciprocal deal with the baker where the baker gives out a $2 gift voucher for a purchase over say $12. The $2 gift voucher can be redeemed at the butcher and so the cycle goes on.