What happens when you discount your prices?

by Kate on June 12, 2012

Price reductions may be good for the customer, but business owners should be careful with this strategy.

When selling price is reduced more must be sold to cover the cost of running the business. Plus, the cost of selling more puts extra burden on the business. It can add up to less profit and more stress.

Especially with careful buyers who may think twice before parting with their money, it’s foolish to assume that reducing price means more sales. And even if you do attract more customers, it’s quite likely that costs to support those sales will be greater. Let’s take a look.

Here’s a simple example:

Lets say your business expenses are $100 (rent, wages, electricity, marketing etc)

You sell Blodgets (bought from a manufacturer), which cost $10 and sell for $20. So to cover the $100 expenses you need to sell 10 of them ($100 divided by $10)

Suppose you find a cheaper source of Blodgets. These cost $8 and you decide to sell them for $15. Now you make $7 per item sold, so to get that $100 to pay your expenses you must sell 15 ($100 divided by $7).

That’s 50% more items to sell.┬áRather than attracting and serving 10 customers, you may now need to find and serve 15 of them!

This means you may need to:

  • Attract more customers, which may mean more marketing costs
  • Purchase and store more stock
  • Have the sales people attend to the needs of more customers, so they’ll probably need to be more efficient – or employ more people (usually at a greater cost)
  • Handle more transactions through the bank account

All of these will tend to make business more costly to run. To avoid being worse off in terms of profit the business then needs to be more efficient with marketing, selling and stock management and find ways to save costs in these areas.

Whatever you make and sell, a similar pattern is likely to apply, though the details will differ in each business.

This goes some way to explaining why discounting can be such a headache (and not financially rewarding) for many businesses.

Even if it leads to extra sales, discounting, or finding cheaper products or services can create challenges in other areas. It’s not necessarily a bad thing and it can be part of a well thought out strategy. Still you will want to think carefully about your pricing strategy and its impact on the rest of your business – and adjust your business practices accordingly.

 

 

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