Death by discount

With the Christmas sales and specials bombarding our TV screens and letterboxes, it’s a great time to talk about the biggest dilemma in the world of retail – discounting.

Most businesses can go one of two ways with their pricing strategy:
Mass sales with low margins – usually associated with a lower quality provider who focus their advertising messages on prices.
Less sales with high margins – usually associated with a higher quality provider who focus their advertising messages on quality, service, and other differentials.

We often talk about discounting as a vicious cycle – once you have made the decision to discount on a regular basis, it’s very difficult to change this behaviour. Constant discounting behaviour can have a long term detrimental effect on a business’ positioning and customer loyalty. But what is the real bottom line impact of the classic % off sale?

Cast your eyes over this:

As the table proves, increases in sales volume is not proportionate to discounts in price, if you want to maintain your profit margins.

On the opposite end of the scale, what is the impact of a price increase on sales volume? This may be the case for a business who wants to lift their positioning or out-rank a competitor, without impacting their total sales.

As the table shows, if prices were increased by 5%, you could suffer a 20% drop in sales and be no worse off.

These two little tools are great ways to plan your pricing strategies and consider the real impact of the decisions you make. Make sure you consider the short and long term effects before hitting the discount merry-go-round this Christmas.