20% off this! 50% off that! Stop the madness! In general most small business owners discount either to increase sales or move inventory. Which seems great but can be detrimental to a small business!
Here’s why. If your profit margin is 20% and you discount your product 20% you’re not breaking even. You are in fact losing money on EVERY ONE of those sales!
In my experience most small business owners don’t consider, factor in, their overhead cost. If your overhead is 40% then selling a product at what most would consider break even (which some will, as a loss leader) in reality, loses your business 40% on EVERY sale.
Let me give you a simple example.
| Retail Price | 1.20 |
| 40% Overhead | (.48) |
| 20% Discount | (.24) |
| Net Profit | .48 |
| Your Cost $1.00 | ($1.00) |
| Net after discount | (.52) |
You are losing .52 on every sale! Stop discounting! Rather than discounting add value.
Rather than discounting, add an additional product or service. To learn more about how to add value read the add value post next.
Kim’s sweaters retailed for $50.00. She decided to move the sweaters she would have a 20% off sale. After all, she had a 100% mark up on these sweaters and would still make an 80% profit. Or so she thought. Kim’s overhead was 30%. Let’s do the math.
| Discounting | |
| Retail Price | 50.00 |
| 30% Overhead | (15.00) |
| 20% Discount | (10.00) |
| Net Profit | 15.00 |
| Wholesale Cost to Kim | (25.00) |
| Net after discount | 0 |
However, in the same scenario if we replace a discount with a value add (in this case a scarf that costs Kim $2.00 and retails for $40.00 the sale becomes profitable and provides a $90.00 value to her clients for $50.00.
| Adding Value | |
| Retail Price | 50.00 |
| 30% Overhead | (15.00) |
| Added Value (Scarf) | (2.00) |
| Net Profit | 33.00 |
| Wholesale Cost to Kim | 25.00 |
| Net after discount | 8.00 |
Stop discounting:
- Increase net profits
- Provide more value for your clients