The true cost of discounts
A discount is a reduction in the price of goods and services offered by a retailer to the consumer.
It is relatively simple to calculate the impact of a discount to the retailer. Chris Faul, in his article on discounting [LINK?], has already explained the financial impact: if you offer a discount of 20% and have a 65% gross profit on products, then your turnover will have to be nearly 1.5 times more, to arrive at the same net profit as prior to the discount offering. This 50% increase in required sales may also result in an increase in costs of doing this additional business. Below is a simple depiction of this.
|Normal Scenario||Discount Scenario|
|Cost of Sales||35||51|
|Discount||20%||0||29||(145 x 20%)|
The reasons for discounting are numerous and include:
- Reward for punctual payment – offering a “settlement” discount because cash in your pocket today is better than receiving it later
- Clearing old products – reducing the price of obsolete or slow-moving items to cost, thereby freeing-up cash and space
- Competing for market share – discounting to attract consumers to a location or to keep them from going elsewhere
- Valuing loyalty – loyal customers spend on average 67% more than new ones; achieved by offering “customer-loyalty” discounts on repeat purchases of goods and services; results in brand-building
- Incentivising referrals – giving a discount to a current patient who successfully refers another patient is a lovely “thank you” to your patients for supporting your business
- Attracting new customers – offering a discount for first-time patients is an acknowledgement of appreciation for choosing you; it sets you apart from commodity type businesses and values your experience as personal
- Increasing sales volumes – offering “bulk” discounts is a way of quickly bringing in more cash than selling individual goods or services; if offered in a convenient manner, then it endorses the brand
- Price as a market differentiator – offering a discount on all products at all times; offering a competitively-priced commodity as opposed to a personalised experience.
Each reason has an impact on business performance. Price is only one variable in consumer behaviour. Whilst most consumers have a “value for money” outlook, it remains for the retailer to manage the perception of discounting associated with the quality of goods and services.
Retailers need to investigate what they want to achieve by offering discounts. Once identified, they need to put proper controls in place to ensure that objectives are met – e.g. displaying “stock clearance” items in compliance with consumer laws.
A typical example of how seasoned retailers successfully discount is when they want to clear “old stock”. They advertise and limit the time span of the “sale”. In this way, they are cleverly-positioned to attract a consumer audience who also end up purchasing non-discounted items, the mark-up on which covers the discount of the “sale” items.
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