Discounting Dangers

We live in a price conscious world. Knocking five percent off an item will attract attention. Supermarkets, big retail chains and even e-commerce sites do it all the time. It seems that the human brain has evolved to be attracted to the word “sale” or “discount”.

But what is good for a consumer may be harmful to a business owner. If done the wrong way, a store owner can suffer losses rather than gain additional sales. There are times when giving discounts would be beneficial and even called for, but make no mistake about it, giving discounts often is not a good thing.

Why do businesses give discounts?

Businesses often give discounts to induce a sale. Consumers are really attracted to the word “sale” and will most likely buy something they do not even need when the word discount is attached to the product. Thinking of savings is the main objective of the consumer buying something on sale.

Other times, business would offer discounts on seasonal items. Winter clothes on sale before the start of spring would be a good example. They give discounts to offload items and recoup some of the costs of purchasing the products. They also free up storage space when there is a need to stock up on in-season items.

For entrepreneurs, giving discounts is a way of increasing sales volume. If a lower price point means more sales for the business, then most would argue that it is better to give discounts. They would always say that the volume will make up for the profit lost due to discounts.

So what are the dangers of discounting?

The first and most obvious danger of discounting is that it cuts the profit margin. For every 10% you give as a discount, if your profit margin is 30%, you need to increase sales by 50% to cover for the lost profit. If you get the increase in sales then it is all good; the problem is when you don’t.

Cutting your profit margin would entail additional costs with an increase in sales. Increasing sales mean you have to work doubly hard. That could mean additional labour, capital or overhead. You also have to market discounts via ad campaigns or in-store materials.

Another danger of discounting is that according to studies, customers who are attracted to discounted items do not come back to the store to purchase again. So if the goal of giving discounts is to gain new customers, then discounting should be the last thing on your mind. It would be better to spend on marketing campaigns to increase sales rather than giving discounts. With marketing campaigns, you can compute how long it takes for you to recoup your investments. With discounts, there is no guarantee that you will make back what you lost.

If you are looking to increase your customer base, discounting should not be the way to do it. Hire a good PR firm to do a marketing campaign, think of ways to add value to your products or even expand your business.

Discounting only works in certain conditions not as a primary option for increasing sales. If you want to grow your business and you need someone to help you out, contact Brad Flynn. He is the leading Action Coach based in Brisbane and is the perfect man to help you grow your business.

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