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Discounting is a very common practice and can help business owners to move stock, attract new customers, or reach sales targets during certain slow periods, especially in a tough economy.

Discounting can be temporary or semi-permanent, but its use should be carefully monitored to ensure you are achieving the intended results.

For whatever reason a business decides to discount its prices, the strategy and objective behind the discounting needs to be fully defined to ensure that the returns will justify the action of discounting. 

Before you start cutting your sale price in the hope of boosting sales, it’s good to ask yourself some questions: –

  • If I discount, will my customers be happy to pay the ‘full’ price again once I take off the discount?
  • If I am discounting purely to move obsolete or slow moving stock, is this the best option?
  • How long should I keep a discount in place and how easy will it be to resume the normal pricing strategy?
  • What kind of discount strategy should I use? Different industries employ different discount strategies.
    • For example, airline industries seldom discount empty seats, even as the departure date nears. However, they regularly do a discount upfront to customers who have flexible schedules and fly non-peak time.
    • Online retailers may discount on the basis of being able to increase the quantity of items sold. If you set free delivery at $100 or over and have an existing Average Transaction Value of $110, you can discount down to reduce this to below $100 and push a cross-sell item to increase the basket size.

Are discounts effective in increasing your income and can you still make a profit? Do you know your current gross profit margin?

Below is a table showing the increase in sales volumes required to achieve the same return when discounting your price.

Let’s take the example of a discount of 5% on the normal sale price of an article. If your gross profit margin is 25% and you decide to discount your goods or services by 5%, you will need to increase your sales volume by 25% to make the same gross profit margin.

If you cut your prices by…  and your present gross margin (%) is…
0% 15% 20% 25% 30% 35% 40%
5% 50.0% 33.3% 25.0% 20.0% 16.7% 14.3%
6% 150.0% 66.7% 42.9% 31.6% 25.0% 20.7% 17.6%
8% 400.0% 114.3% 66.7% 47.1% 36.4% 29.6% 25.0%
10% 200.0% 100.0% 66.7% 50.0% 40.0% 33.3%
12% 400.0% 150.0% 92.3% 66.7% 52.2% 42.9%
15% 300.0% 150.0% 100.0% 75.0% 60.0%

Choosing a right discount strategy can help a business owner meet their sales objectives, enhance their reputation and provide the best profit point for the market demand.

Developing an effective discounting strategy is an area in which Jaguar Bookkeeping specialises, so please feel free to contact us on 08 8212 0217 or info@jaguargroup.com.au if you require any assistance or would like a Free Business Health Check.

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