The impact of discounting

Eugenie Jones Accounting & Compliance, Business Strategy & Planning, Managing Cash, Odds & Ends

“I’ve got a cheaper price from someone down the road – can you match it?”

Business in all industries are faced with this all most daily. If you’re one of them, and don’t understand the impact of it on your business, then this article is for you.

What most people do is haggle with the customer…“we can’t quite match it, but we can do XYZ instead…”. Ultimately, they’re eroding their bottom line without realising it, and not in the way you think.

First though, when we’re working through a business coaching program with a business owner, we focus on explaining how discounting isn’t simply a top-line sales problem. Sure, the discount drops your sales, but the consequence is bigger than dropped revenue.

The discount means you:

1.  Make less profit from this customer

2. Need to have enough capacity to serve this customer, and the next customer replacing the lost profit from this customer

3. Fund the working capital to serve them (cashflow!)

4. Spend more advertising to the next customer (to replace the lost profit), and take up staff time onboarding/converting the next customer

5. …and more. You’ve devalued the relationship with the customer, set discounting expectations, and damaged your brand.

 

A quick example:

Take an electrician, who’s usual hourly rate is $60 + GST. They’re paying their staff $25 per hour, and spend another $15 running the vehicles etcetera. They’re making $20 per hour, or 33% margin.

Let’s say they offer a one-off discount of 10% during a quiet patch. That costs them $6 per hour, and the logic for offering the discount is sound (“we’re low on work so I’d rather offer the discount to keep the work coming in the door).

To replace the lost revenue from the discount, the electrician needs to charge out another 30% above what they’re doing today to recover the lost profit. Yes, 30%.

Finding the capacity in the business to do an extra 30% becomes the next challenge for the business coaching we’re working through with our customers.

If you’d like to arrange a no-obligation chat to understand the impact of discounting, get in touch. We’re happy to help.

For access to materials your company can use to create a plan to move through the Growth Curve, please visit here.