For example: imagine that your customer is paying £100 for your product or service, and your direct or “variable” costs are £60 (we are going to ignore the fixed costs at this point, as they will not be directly associated with discounting your product).
You therefore have a gross profit of £40. If you give a 10% discount, you are reducing the amount you receive to £90. Your direct costs, however, remain the same at £60. Now your gross profit is £30. The decrease of just 10% of the price is creating a 25% decrease in your actual profit.
If you are planning to attempt a discount in your product, make sure you assess the actual impact on your business – often it is not worth it. If you want to take your business to the next level, consider increasing, not decreasing, your prices.
Most people only increase their prices because their costs have increased, but I believe this is a missed opportunity, especially for those who provide services. If you have been in business for some years, your brand has gained value. You have proven that there is a market for your product and that in itself makes it more valuable. Also, as a long-standing business, you provide assurance to customers that your product is worthy – so you can add a premium for that assurance.
Another way is to identify your competitors and figure out how and why you are better. If you are not, then make yourself better so you can increase your prices. When the value of your product has increased, you can then reconsider your pricing strategies.
Here is what increasing your prices could do for you:
Let’s assume your price is £100 and your direct costs are £80. Imagine you have worked out that compared with the rest of your industry, your products are now worth 10% more. Now that you are charging £110, while your direct costs are still £80, you are getting a gross profit of £30. You have increased your profits by 50%.
When you increase your prices, even by an incremental amount, the effect on your profits can be just as dramatic as the damage that comes from discounting your products.
If you feel it is necessary, you can give your customers a lower price, while adding value, and not discounting. For example, by giving offers instead of discounts.
Supermarkets do this; e.g. “£6 off your next £40 spend” or “buy 2 get 1 at half price” – these add value without actually discounting your products. Analyse the numbers and you will realise the effect to your gross profit is not nearly as massive as giving a straight discount.
If you feel, for your business, that you absolutely MUST offer a discount then make it work for you in some other way. For example, relate the discount to an early-bird payment or shorter credit terms such as, “10% off if you pay up front.”
The most important thing is to be really aware of the effects on your business from the offers you are making. Whenever you can, say no to discounting when trying to increase your sales, and instead think of smart pricing strategies to provide value without slashing your profits.
Shweta Jhajharia, is a multi- award-winning business coach and the Principal Coach and founder of The London Coaching Group.