A discount usually costs far more profit than it looks. Your costs stay the same while your price drops, so in the example below a 50% discount cuts profit by more than 80%, for exactly the same amount of work. Instead of discounting, add something of value to the deal, or make it clear why you're worth paying more for.
The temptation
When the phone isn't ringing and the emails aren't coming in, a discount is the easy option. Run a flash sale, knock 50% off and wait for the orders. But have you worked out what it does to your profit? You might think 50% off means about 50% less profit. It's usually a lot worse.
The simple maths
Here's an example. You sell a product for £250 and sell 400 of them.
- Revenue: 400 × £250 = £100,000
- Cost to supply each one is £75, so 400 × £75 = £30,000
- Fixed costs for the year: £10,000
- Profit: £100,000 − £30,000 − £10,000 = £60,000
Now take 50% off:
- Revenue: 400 × £125 = £50,000
- Cost to supply is still £30,000
- Fixed costs are still £10,000
- Profit: £50,000 − £30,000 − £10,000 = £10,000
A 50% discount has cut profit from £60,000 to £10,000, a fall of more than 80%.
And it's the same amount of work. Every order still has to be delivered, followed up and supported, with the same risk of returns or refunds.
Two better alternatives
1. Add value instead
Give people more for their money without cutting your price. Everyone loves feeling they've got a good deal. Instead of knocking £125 off, could you add something with a perceived value of £125 that costs you much less?
Ideas: free set-up or installation, an extra gift, a late check-out, an extra 30 minutes on a treatment, a room upgrade. Every industry has its own version.
2. Stand out so price matters less
What makes you different from your competitors? A great guarantee? An award? Something you do that they don't? Make it clear in your marketing, and customers stop looking for a discount and are happy to pay for what makes you special.
Next time you're planning an offer, resist the easy discount. Come up with something more creative and more compelling. For more on pricing, see what it would take to double your profit.
Frequently asked questions
Should a small business ever offer discounts? Rarely, and only when you've done the maths. Work out what the discount does to your profit, not just your sales, and try adding value first.
Why does a discount hit profit so hard? Because your costs don't fall when your price does. The discount comes straight off your margin, so profit falls much faster than the price.
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