How to discount without impacting on your profit margin
Offering discounts is a popular promotion technique to help increase sales and attract new customers, particularly if business is slow or you’re just starting out. Before you start offering discounts across the board, some careful planning, and considering other ‘value add’ alternatives, can help ensure your bottom line doesn’t suffer as a result.
When should you offer a discount?
Before offering a discount, you should be clear on what you’re trying to achieve. This could be:
- increasing foot traffic
- attracting new customers
- clearing old stock and freeing up space (retail space is valuable, so make sure you’re optimising it)
- showing appreciation to your existing customers
How to calculate your discount
Number crunching is an important first step to take when planning discounts or sales; you need to know the number of sales required to maintain the current levels of profitability. This includes working out:
- the profit margin of each product or service you plan to discount
- the mark-up percentage for each product or service
- the breakeven point (how many products and services you’ll need to sell during the discount period to maintain your profitability)
These figures will give you a clear understanding of the volume you’ll need to sell during the discount period.
Tip: Download our free business templates and tools to help you calculate your profit margin, mark-up and breakeven points.
If you’re uncertain whether you can meet the sales volume needed to maintain profitability during the discounted period, consider these alternative strategies to help you add value and attract new customers:
- Providing add-on services; such as a free demonstration of how to best use the product/service, free installation or after sales support.
- Offering additional product or service for the same price (such as 3 for the price of 2).
- Giving bulk buy discounts which allow you to sell a greater volume of product before a discount is applied.
- Conditional promotions that require a certain value to be purchased before a discount is applied. Some examples of this could be:
- spend $100 and get $20 off
- buy 5 items to get 10% off your total purchase
- spend $100 to get an item up to the value of $20 free
- buy one $50 item and get a second $50 item at half price
Spreading the word
Once you have worked out the details of your discounting/promotion, plan some marketing activities to make sure the offer will be seen by the right people in your target audience. Read our marketing and promotion strategies to help you get started.
Contact our free business advisory service if you’d like more guidance on how to promote your business and increase sales.
If crunching numbers isn’t your strong suit, our financial management series of workshops to help you master the essentials and track the financial health of your business.
Photo credit: Tourism Western Australia