There’s more to offering a discount than simply reducing your prices.
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
Consider the downside of discounting
Before you start to mark down your prices, take a moment to consider the potential impacts:
- People may think your product is ‘cheap’. If you discount too often, customers may start to doubt the value when your product or service is offered at full price.
- Bargain hunters don’t stick around. They’ll leave as soon as someone else is cheaper.
- You’ll need to sell a lot more to earn the same amount. Even a 10 per cent price cut can result in needing to sell a third more just to break even.
- Price wars hurt everyone. When rival businesses continue to undercut each other, everyone’s profit margin shrinks.
- The law still applies. If you advertise ‘Was $50, Now $35’, the ‘was’ price must be real. You must have sold (or at least advertised) the item at $50 for a reasonable period (usually a few weeks) right before the sale to comply with the ACCC’s price display requirements. When offering discounts, it’s good practice to keep clear records detailing when every price was live.
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: Use our free business templates and tools to help you calculate your profit margin, mark up and breakeven points.
Alternate options to consider
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 three for the price of two).
- 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 per cent 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.
More information
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 small business workshops can help you master the essentials and track the financial health of your business.
