Are Discounts Hurting Your Business’s Profitability?

Running a sale to attract customers is a time-honored marketing strategy, but is it one you should be using in your business? Learn why discounting can erode your profits even as it stimulates sales and find out what you can do to avoid having to discount prices to compete.

Price tag markdowns, sales promotions, and vouchers perform an important part in most retail firms. They stimulate curiosity and product sales, which in turn generates a noticeable lift in revenue.

Furthermore, cost reductions reach customers who may in any other case choose not to buy certain items. The trouble is, small retailers who rely heavily on customer and brand loyalty may be tempted to reduce costs whenever they are overstocked or sales are unexpectedly sluggish. The instant increase in product sales conceals a number of drawbacks.

Here, we’ll clarify the reasons a business model developed on continual price markdowns is fraught with limitations. We’ll also explain why discounting may still make good sense for your retail shop in particular circumstances.

Understanding the Limitations of Discounts

Discounting has always been an effective strategy to lift sales. Retail stores in every area of interest have decreased costs to create more business. Over the past number of years, however, continual price discounts have become a veritable business plan, with many merchants rarely selling merchandise at “typical” prices. For instance, coupon engagement rates are at their highest levels. In addition, discount campaigns, once offered on an occasional cycle, have become perpetual for many merchants. As previously noted, this strategy genuinely does promote sales. However, it’s important to be aware of its disadvantages.

First, clients who purchase items when prices are decreased provide no reflection of their future purchasing behavior. For example, a half-gallon of frozen treats usually marked at $5, but discounted to $2.50 for a promotion, may produce product sales; but the store is going to get no insight into its buyers’ long-term buying decisions.

Second, unless discounting has been included in a retailer’s long-term pricing plan, it demonstrates an erosion in margins. The retail store owner will endure a decrease in earnings together with the drop in costs.

Continual price reductions can diminish customer devotion

In addition to eroding margins and a lack of insight relating to future customer tendencies, regular reductions may well also cause your buyers’ devotion to diminish. The same way your customers are faithful to particular brand names, so too are they devoted to your shop; but if you aren’t the low-cost leader in your specific niche market, your pricing strategy is unlikely to be the origin of their devotion.

They stop by for some other good reasons, such as the level of support they get, or the breadth of assortments your store provides in certain product categories. If you reduce your prices often, you might begin to attract low-cost buyers. This could be positive if your retail model is based on selling goods in high volume. If this isn’t the condition, you may tarnish your shop’s “brand” and thereby lose your existing clients’ devotion.

You might get stuck having to always cut prices

You also have to remember that if you cut your price for one customer, you will potentially send signals to other customers and prospects.

If all of your current and potential customers are going to find out, then all you’ve done is move yourself into a permanent state of always having an issue with cash flow. The reason is simple — you’ll now be selling everything at a lower price.

What do discounts say to your competitors?

Just as you need to be conscientious of what messages you’re sending to customers and future customers, you also must be aware of what your discount says to your competitors. They might respond by cutting their prices to match yours.

When one company cuts its price and everyone follows, the loop is often broken only when one company ultimately goes out of business or leaves the marketplace to focus on something else.

Does discounting still make sense for your store?

Despite the troubles imposed by ongoing price cutbacks, they may from time to time be useful for modest retailers. As mentioned, marking down items may stimulate sales, thereby getting rid of slow-moving products. The big-box merchants can steer clear of being trapped with stagnant stock. Most of them keep contracts with their vendors that allow them to give back products that don’t sell. Small merchants don’t have this protection on the majority of their stock; merchandise that continues to be on their floors and shelves cannot be returned. Markdowns become essential in order to move the goods.

If you do need to cut your price to gain a sale and create cash flow, then it’s imperative you do it in a way that will not send signals to other customers or competitors. Make sure the customer is isolated enough and the customer is not going to become a long-term customer.

You may also need to clarify to your customer that the discount is a “one-time” discount. The last thing you want to do is discount a price for a customer on one sale to create cash flow, only to have them expect the same reduced price for years to come.

How to Avoid Discounting Your Store’s Merchandise

Self-sufficient retailers who end up consistently discounting their stock may prevent these kinds of situations with a little upfront planning.

First, they have to create a reasonable sales strategy for each season (or quarter). The strategy ought to be based on sales statistics generated during previous years. It ought to steer clear of overoptimism about sales growth throughout the upcoming period.

Modest retailers should additionally keep slim stocks, even if their suppliers offer attractive prices for bulk orders. Large stocks frequently grow to be flat, leaving vendors with merchandise they can’t sell without applying extreme markdowns. Keeping stocks small gives self-sufficient store owners much more flexibility in their cash flow. This permits them to take advantage of new possibilities when they arise.

Sales consultant Mark Hunter, known as “The Sales Hunter,” also advises companies to deploy a thorough sales process in order to avoid having to discount. This involves asking enough questions and follow-up questions to fully understand and meet customers’ wants and needs, as well as making sure your customers fully understand the value of your products at their existing price.

Hunter also advises that, instead of discounting your prices, the better decision might be to offer a customer more of something in order to close a sale. For instance, if you’re a software company, you could offer free onboarding rather than discounted prices, thereby costing you less in terms of effect on your bottom line and giving the customer more value.

To further protect yourself from being in the position of having to discount, be sure to build a marketing strategy that allows you to sell to different markets or industries. This way, even if you have to discount, you can do so with one set of customers as opposed to all your customers across the board.

Discounting: Final Thoughts

To summarize, discounts represent a beneficial retailing technique in isolated circumstances. They bring customers to your store; they encourage them to make purchases; and they help to sell goods that fail to sell at their normal prices.

But be skeptical of using discounting as a crutch for short-term profitability. At the end of the day, only you can decide if discounting your price is a good or bad way to create cash flow. No matter what, make sure you think it through.

Finally, your sales and pricing strategies can only be profitable if your customers are paying you. Our ZenBusiness Money app makes it fast and simple for small business owners to get paid. Use it to easily send custom invoices, accept credit card and bank transfer payments, and manage your clients all from one easy-to-use dashboard.

Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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