COVID-19
17 January 2020Some marketing mistakes to avoid
17 March 2020Beware of discounting!
- Given that purchasing decisions are made on price in only 15% of cases, you need to question why you give discounts to 85% of people who don’t ask or seek our discounts.
- Discounts generally don’t motivate the 85% greatly and the volume of additional sales that need to be made up for lost profits can be quite large as the table below shows.
- Discounting should be avoided on your normal sales items.
- To read the table, select your current gross margin from the top line and pick a discount rate percentage on the vertical axis. The intersected figure is the percentage by which you would need to increase your sales by to produce the same profit.
To produce the same profit, I will need to increase my sales volume by ….%
PRESENT GROSS PROFIT MARGIN
|
Discount Rate |
20% |
25% |
30% |
35% |
40% |
45% |
50% |
55% |
60% |
|
2% |
11% |
9% |
7% |
6% |
5% |
5% |
4% |
4% |
4% |
|
4% |
25% |
19% |
15% |
13% |
11% |
10% |
9% |
8% |
7% |
|
6% |
43% |
32% |
25% |
21% |
18% |
15% |
14% |
12% |
11% |
|
8% |
67% |
47% |
36% |
30% |
25% |
22% |
19% |
17% |
15% |
|
10% |
100% |
67% |
50% |
40% |
33% |
29% |
25% |
22% |
20% |
|
12% |
150% |
92% |
67% |
52% |
43% |
36% |
32% |
28% |
25% |
|
14% |
233% |
127% |
88% |
67% |
54% |
45% |
39% |
34% |
30% |
|
16% |
400% |
178% |
114% |
84% |
67% |
55% |
47% |
41% |
36% |
|
18% |
900% |
257% |
150% |
106% |
82% |
67% |
56% |
49% |
43% |
|
20% |
* |
400% |
200% |
133% |
100% |
80% |
67% |
57% |
50% |
|
25% |
* |
* |
500% |
250% |
167% |
125% |
100% |
83% |
71% |
Examples where price discounting may have some validity include:
• To reduce slow moving stock (a financial cost decision)
• Loss leader marketing (a marketing cost decision)
• Bulk deals (because activity costs are reduced)
• Packaging deals (because activity costs are reduced)
• Special deals for existing customers (effective marketing)
• Settlement discounts (a financial decision)
The direct connection to profit
• The direct connection between price and profit is often overlooked. Just as a price increase adds straight to the bottom line profit, a price discount comes straight off the bottom line profit.
• Research has shown that the most common discount given by sales people is 10%. Most businesses have a net profit percentage of between 5 and 20%. To give 10% of it away in a price reduction is very costly indeed!
Does it all seem too challenging? Our Business Improvement Division can help you develop strategies and implement action plans to improve the bottom line profit of your business and much more! If you would like to discuss how we can help your business achieve more, please contact Louie Torre.