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PKF Australia

Accountants and Business Advisers

Can you afford to discount?

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Andrew Beattie

Director

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Can you afford to discount?

Do you price discount in your business? Do you call it something else to convince yourself you don’t discount? Do your staff do it for you without you knowing? Can you afford to?

Sometimes discounting has to occur I am quite aware of that but it should never be your default position unless your cost structure supports the strategy. I deal with a lot of business across many industries and every one of them participates in some form of discounting within their business. Whether it is the Happy Hour in the pub to a doctor bulk billing instead of charging the gap to a pharmacist advertising cheap medicines to a manufacturer charging less because the customer is a big company; these are all forms of discounting that have significant impact on the business performance.

This is not to say discounting does not have a place but first a business should know why it is discounting, measure the impact and understand how the overall business benefits from this strategy. A pharmacy will often offer baby care products at a fairly low margin in order to draw an audience into their store to sell other high margin products such as beauty care and fragrances to their captive audience being mothers. This is a good strategy. On the other hand being a high service model pharmacy and simply cutting price of medicines because the discount pharmacy up the road is doing it is not smart. The service model needs the additional margin to cover the higher costs of a service model particularly labour.

Likewise the traditional happy hour that publicans run day in day out because that is what we do. Does it actually make you money or cost you money? How many more schooners do you need to sell to justify? Unless you are getting an increase in other forms of income such as food or gaming or drawing in many more spending customers then more often than not you would be better not to have happy hour.

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As a way of illustration, have a look at the table above (many variations of these exist with a quick google). Lets say you currently make a 30% margin and you reduce your price by 10% . You would need to increase your volume of sales by 50% to maintain your overall profit. This is a staggering increase and one I doubt many businesses achieve when they discount. You see the costs are still there so the only thing you can reduce by discounting is your profit. Doesn’t make a lot of sense does it? So unless you are using discounting as part of wider known strategy you would generally be better off to let the sale go.

Many businesses use discounting as a means to compete but I would challenge that they don’t understand their market or their point of difference. Most customers, and before you say it I know there are exceptions, don’t make a decision to buy based on price; they make it on value and value can hold a different meaning from one person to the next. This is a topic for another day.

So if you are discounting your price or rate and don’t understand the effects it is having on our profit and cash flow or you don’t understand why you are doing it, stop. Seek an adviser that can help you break it down and build a strategy to take you forward.

Originally published on andrewbeattie.com.au


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