For whatever reason, you want to or need to discount a line or service. You may have a bucket-load of reasons on why you want to do this – maybe it’s for market share, or penetration, or a competitor has opened next door. Either way, the reason for discounting is immaterial. How much you discount is more important.
Unless you are planning on using discounting as a loss leader, then it’s probably best not to discount at a loss.
It might also be better to throw away that “just about to expire fresh chicken” rather than offering it at a discounted price for quick sale. The lawsuit might just be enough to tip you over the edge.
If you are discounting to price match, then the equation is easy. You discount to the same value regardless of your own unit costs. If you are making a loss as a result of the discounting, then ask yourself how long you will be able to sustain the loss before you close the doors, and what is the outcome that you plan to achieve out of this discounting. Put some review stages in the process.
Let’s look at what discounting does to the number of unit sales required to maintain the same income level if not discounting. For the purpose of this exercise, the following product associated costs exist:
You typically sell 20 ACME Anvils per month giving you a sales total of (20 X $100) = $2000, minus your unit costs (20 X $20) = $400, giving you a gross profit of ($2000 - $400) = $1600. Not bad as there is generally not a lot of call for anvil’s post industrialisation. You are comfortable with this income level.
If you discounted the anvils by 20% (after all the margins are healthy), how many more anvils would you need to sell?
If your pre-discount profit was $1600 and your discounted profit is now $60 per unit (RRP-20%-Wholesale Price), you would need to sell an additional 7 units to maintain the same gross profit level. You have to sell 35% more anvils with a 20% discount to make the same profit as pre-discounting.
Or lets looks at another way: Discounting by 20% drops your profits by 25%, discounting by 30% drops your profits by 37.5%. If your original margins are not as healthy as in this example, then a relatively small discount will quickly send you into a loss making exercise.