[SSB#24] Is discounting eating your profits?
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Welcome to the 24th edition of our newsletter "Supersonic Business", a fortnightly publication by me, Laura Landmark, with a focus on business growth, value and performance management, in other words, all things that make a business better.
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Sandnes, Norway, Wednesday morning, 23rd September 2020 🌧️
"Supersonic Business" is sent from me, a Management Accountant, to those that have a leading position in SME's (small/medium businesses). The vision for the newsletter is to share information, tips and tricks to build healthy, thriving businesses from the 'inside out', it is written from the finance and administration perspective.
I hope you enjoy [SSB#24], write to me on email@example.com if you have any feedback or questions.
I went into a well-known electronics store last week to buy a mouse. I took it to the cash desk and he looked at the box, and immediately decided to give me a 10% discount since there was apparently a paper cover missing from the box.
I didn't complain, however it did strike me as a little unnecessary. I didn't know there was a paper cover missing from the box, I hadn't asked for a discount, and the mouse inside was brand new.
Discounting is a funny thing, as people invariably go from 0% straight to 10%, sometimes stopping at 5%, there doesn't seem to be a 2%,3%,7% or 8% discount. Apparently people only really think in multiples of 5%, maybe because it feels neater, simpler, easier to calculate, we apparently like sequences that step up in multiples of 5!
There is a whole psychology around discounting actually, did you know for example, that people often prefer receiving a product for free in a BOGOF (buy one get one free) than receiving a 50% discount, even though they are exactly the same thing.
So people are funny things, not entirely logical, and discounting is common practice in business. But is it a good thing? How much is it hurting your bottom line, or your net profit? Do your salespeople realize the effect of freely giving out 10% discounts when what this means? The reality is that you could be wiping out your entire profits for that particular sale.
How many more units or hours would you need to sell to recover the amount you just discounted away? Let me demonstrate this in a small video.
Now don't get me wrong.. sometimes discounting is a good thing, when it is done consciously and for a purpose. Maybe you are trying to clear stock, maybe you are introducing a new product with a time-limited promotion duration. Maybe you have an offer to acquire new customers, or to show appreciation to your existing customer. Discounts are a normal part of business, but one should be very aware of the consequences of discounting.
The important thing is to have full control on what products or customers warrant a discount and to make your sales force aware, so that discounting is done intentionally, and not on a whim in the case of my mouse!
We accept less as we think little is better than nothing, that is not always the case, check the figures, check the facts!
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Setting the right price is not always easy, but with the right strategy, it can make the job less complicated. It's also interesting that there is a good deal of psychology behind pricing.
I don't know why the man at the electronic shop really gave me a discount. Was it actually because of the paper that was missing? According to Profitwell psychological pricing is a pricing strategy that utilizes specific techniques to form a psychological or subconscious impact on consumers. It integrates sale tactics with the price.
In this article, you can learn more about the pros and cons of psychological pricing and the most popular strategies for psychological pricing.
Considering a sales discount?
Have you ever thought that giving discounts can put you in a bad light? According to Hubspot, there are a lot of layers and potentially negative implications you should consider before offering a discount. In this article, Hubspot gives insight into when you should offer discounts and when not to offer.
Understanding the math behind discounts
Price is one of the four elements of the Marketing Mix. When setting your pricing strategy, should discounts be a part of it? The Marketing Mix Pricing is the only element in the mix that generates revenue, so before you decide to give discounts or not, you should understand the impact it will have on your bottom line.
Learn how to grow your business with this 11 psychological pricing strategies
What are the advantages and disadvantages of psychological pricing? Linnworks gives you 11 psychological pricing strategies.
Books on the bedside table this week.
This is a really good wake up call about the world we created for ourselves full of diversions and 'happiness' vs freedom and character.
It is quite controversial and will not resonate with everyone, but I think it is really worth a read as it gets you focusing on the things that we should be caring about and thinking differently.
Always end with a thanks!
🙏Thanks to all of the interesting people I have had the pleasure of meeting this week as we have been interviewing for a new spot at Mantle.
Thanks for reading & see you next time
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