Why discounts don’t work

Written by  //  February 14, 2012  //  Daily Juice  //  No comments

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Listening to the radio yesterday all six adverts in the commercial break immediately prior to the news offered some form of discount. 20% off! 30 % off! 50% off! cutting prices

So it’s no surprise then that we small business owners think that discounting is a good thing. After all if everyone else is doing it must work, right?

Wrong.

Rather than being a shortcut to a successful business, discounting is a shortcut to no-business.

Here, with a bit of help from some maths, is why:

Imagine you sell shoes. The shoes cost $50 a pair to buy and you sell them for $100 (a mark up of 100%.)

In week 1 you sold 10 pairs so you made revenue of  $1,000 (10*$100) and a profit of $500 (10* $50).

While you’re happy to have sold 10 pairs you really need to make more money so you decide to cut the price of the shoes in the hope that you will sell more and make a bigger profit.

In week 2 you offer a 20% discount and sell the shoes for $80 (80% of $100). Each pair will now earn you a profit of $30 ($80-$50).

With not too much extra effort you sell 15 pairs of shoes – 50% more than the week before. You’re delighted.

But then you do the maths. 15 pairs of shoes has earned you a profit of $450 (15*$30) which is $50 less than the $500 you earned the week before. You’ve gone backwards not forwards

Hmmm

You really need to earn $1,000 per week. So you decide in week 3 to discount the shoes by a further 10% and sell them for $70 a pair. This will earn you a profit of just $20 per pair but you hope that the shoes will just walk off the shelves at that price

Then you do the maths and realise that you are going to have to sell 50 pairs of shoes to earn $1,000.

You usually sell 10 pairs a week so 50 pairs is the equivalent of 5 weeks worth of customers. You realise that there’s no way that 50 customers are just going to swing by and purchase shoes. Nope. You’re going to have to do some extra advertising.

So you put together some marketing stuff that you hope will be good enough to attract 50 new customers. It cost you $100 to put together so now, groan, you have to cover the cost of that as well. That’s another five pairs of shoes to sell.

You hold your breath until the end of week 3. The shoes are on sale at $70 per pair, the store is busy and the till is ringing.

Sunday night you add up the takings. There’s $1750 in the till. That means you sold a massive 25 pairs of shoes.

It’s good, but it’s not good enough!

The profit on the shoes is $500 (25* $20) which is, yes, right back where you started in week 1 when you sold 10 pairs at full price.

Except you didn’t even make $500 in week 3. Remember you had to pay $100 to attract the extra customers. You actually made just $400.

So at the end of your discounting experiment you sold your shoes at a 30% off, sold 150% more than in a usual week, and you earned less money.

That’s why discounts don’t work.

Yes, there are occasions when discounts work, and if you are overstocked and need to get rid of stuff at any price, discounting will get it moving.

But before you embark on any discounting strategy, do the maths.

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