Holiday Price Discounting – A Two-Edged Sword (Part 2 of 2)

With unemployment stuck near 10{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b} and the experts forecasting lackluster holiday sales for 2010, there’s tremendous pressure on business owners to follow the lead of the “mega-marts” and large corporations who began actively discounting and offering free shipping before the holiday season even arrived.

Should you follow their price cutting strategies? If you do, how much sales volume increase will you need to return to the same level of profitability?

Here’s An Example

Let’s illustrate the effect of a 10{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b} cut in the selling price of an item on a hypothetical business operating on a 30{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b} gross margin. In this scenario, a $100 retail item would generate $30 in gross margin dollars (gross margin is the amount of money you make over the wholesale cost of the item, not considering other expenses it takes to run your business).

If you hold a 10{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b} off sale, then you sell your $100 item for $90 and you may actually sell more of them. But since the item still costs you $70 from your supplier, you only make $20 gross margin on the sale. You may feel good that your new selling price is still greater than the cost of the item, but your new sales are at the penalty of a 1/3 reduction in your margin revenue, which obviously means you have to sell MORE at that reduced price to make up that $10 difference and bring in the same number of gross margin dollars at the end of the month.

How much more product do you have to sell to make up that difference? Instead of, say, 100 units at the regular $100 price you would have to sell 150 units at the $90 reduced price to achieve the same number gross margin dollars, a whopping 50{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b} increase in sales volume!

Plus, there are added expenses involved with having a sale, like advertising and promotional costs, extra staff to handle the increased customer traffic, etc., etc, all of which will erode your shrunken profit margin even further.

So, I counsel my clients NOT to discount unless it’s a last resort.

What happens if you are in that pickle? First, get help and make plans on how to get out of the jam you’re in. Retain someone who has the experience to help you through this trying time and will give you straight answers instead of a sales pitch.

Then, Business Week magazine ran an article entitled ‘How to Discount (If You Insist)’ in their August 14, 2009, issue with some good advice. Let me summarize it:

  • Discount Briefly – discounting is like a drug and it’s addictive to both companies and customers
  • Discount Credibly – make the rational behind the discount credible and obvious to customers. Make sure your sale is not perceived as an act of desperation, and
  • Discount Creatively – focus on promoting lower priced options, brands, or selections that will allow you to maintain your per sale gross margin to avoid having “Sale” tags hanging on items all over the store.

Finally, don’t let your customer service slip. Make the trip to your location a great experience for your customers and they’ll return to open their wallet in your office or store instead of the competition’s.