Price discounting is the silent assassin in a business
It’s fascinating how many businesses I come into contact with that feel they have the price discount to win an order, but that’s a whole other post. What I’m going to cover here is the impact of small discounts and how they can kill a business.
Across the globe businesses offer 10% discounts as a matter of course, partly because it’s big enough to matter and partly because it’s believed but small enough not to make too much of a difference to profitability, well thats what people think! There is also another reason, it’s easy to work out!
Let’s use the scenario of a 30% margin business…
So for each £100 sold it has direct costs of £70 leaving £30 in the business to pay for everything else. A customer asks you or your team for a discount and you happy apply 10%
Now £100 becomes £90 but you got the sale, the problem is it still cost £70 so £30 profit you had has now become £20 profit. That means you have to sell 50% more just to stand still! The issue doesn’t stop there, this product (discounted) really takes off and needs more people to sell it, produce it, supply it etc so now the business is adding more overhead to a low margin product or service. I see it all the time, business growing but profits eroded.
Now take this scenario….
Same product or service but 10% price increase…
Now it’s £110 but still costs £70 so £40 left in profit, not £30, this means in order to be worse off you would have to loose over 25% (£40 to £30) of all of your custom to be worse off.
Margin and pricing are so key to business success but knowing the above can stop the silent assassin in your business.
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