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Give Your Small Business A Competitive Edge
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Article 4: Discount Profitably
Like coupons, discounting is one way to possibly gain a competitive advantage and increase business. But it also must be done intelligently, or else you can severely damage your gross margins and, ultimately, your bottom line.
“I’m a big fan of always having something on promotion or discount to create interest and excitement in your business and give people a reason to check you out,” says Steven S. Little, an expert on the subject of business growth and the author of “The 7 Irrefutable Rules of Small Business Growth” (John Wiley & Sons, 2005). “At retail stores, for example, most people will always check the clearance rack to see what’s on sale.”
But discounting must be done right to be profitable.
“The secret to profitable price discounting is to present customers with an offer designed in such a way that, if they buy the offer, you make more money that you would on a normal sale,” says Jim McCraigh, a direct marketing consultant and the author of “How to Write Words That Sell” (Salt River Press, 2005).
McCraigh offers an example to help illustrate: Suppose a mail order and online retailer sells dress shirts for $42, and his cost is $21 for each shirt, for a $21 gross profit (50 percent gross profit margin) per shirt. If he simply offers a 30-percent discount on shirts, his gross profit shrinks to just $8.40, and that’s before catalog printing and postage. Not a great strategy.
But look at what happens to his gross profit if he shifts his discounting strategy to the following: “Buy 2 shirts for $43 and get one free.” He now makes a higher gross profit of $23 ($86 - $63 = $23) than if he sold just one shirt at full price, and both the business owner and the customer are happy.
“To discount profitably, you have to think about the dollar and cent profit on each item, as opposed to just managing the percentage margin,” says McCraigh. “You should also consider what you can do to encourage customers to buy higher-margin items, like bundling high-margin ‘impulse’ purchases with other products and offering a discount on them.”
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