Benefits of discounting
Discounts, loyalty offers and bulk buy pricing are common business practices that can help you:
- move stock
- attract new or inactive customers
- persuade indecisive customers to buy
- reach sales targets during a slow sales period
- improve cash flow
- get free advertising on sales websites
Is discounting worth it?
Discounting can attract more business but can also decrease your profits.
Before you cut your sales price, do some planning to make sure you'll still make a profit on the extra orders coming in:
- Know your current profit margin, markup and break-even point.
- Calculate the best discount price to still make a profit.
- Prepare a marketing plan to encourage new customers and bring inactive customers back.
- Find out what your competitors are offering and their current pricing.
- Review other options for promoting sales offers without reducing the price.
- Decide how long the sales price will be offered.
- Review your accounts for any regular times of the week, month or year that your business has a sales dip.
How discounting affects your sales targets
Whenever you change the sales price (and markup) of your goods and services, it's important to understand how it will affect your profit margins and sales targets.
To successfully run a sale without making a loss, you need to know your gross margin, markup and breakeven figures so you can work out how the discounted price will affect your profit.
In the following table, you can use your gross margin figure (top row) to see how much your sales volume will need to increase (middle cells) when using different discount amounts (in the left-hand column).
For example, if your gross margin is 40% and you decide to discount your goods or services by 5%, you'll need to increase your sales volume by 14.3% to make a profit.
| Current gross margin | 5% discount | 6% discount | 8% discount | 10% discount | 12% discount | 15% discount |
|---|---|---|---|---|---|---|
| 0% | 150% | 400% | ||||
| 15% | 50% | 66.7% | 114.3% | 200% | 400% | |
| 20% | 33.3% | 42.9% | 66.7% | 100% | 150% | 300% |
| 25% | 25% | 31.6% | 47.1% | 66.7% | 92.3% | 150% |
| 30% | 20% | 25% | 36.4% | 50% | 66.7% | 100% |
| 35% | 16.7% | 20.7% | 29.6% | 40% | 52.2% | 75% |
| 40% | 14.3% | 17.6% | 25% | 33.3% | 42.9% | 60% |
Types of discounting strategies
Depending on your business and customer base, you might choose to offer a:
- special offer or price
- package or bundle
- quantity discount
- value added offer
- seasonal or periodic discount
When choosing your discounting strategy, it's important to understand your customers and what offers they will be attracted to.
Special offers and pricing deals
The most typical type of discounting strategy is a special offer or pricing deal. This could be a percentage or set amount, such as $10 off a product or 20% off selected products.
But if traditional discounting isn't working to drive sales, there are other options you can offer that might be more successful – such as free shipping or gift wrapping.
Package or bundle stock
Packaging or bundling stock encourages customers to order more stock or services to be rewarded with a bundled pricing.
Bundling works when the customer can see the benefit of complementary products or services and buying them together at the discounted price. It can also be a good way to move less popular or old stock by bundling it with something that customers see more value in.
For example, a beauty salon could offer bundled pricing for things like:
- buying shampoo and conditioner at the same time, or
- having both a manicure and a pedicure
Quantity discounts
You could also consider offering a percentage discount or 'get one free' when customers buy a set number of items. This increases the size and value of customer orders, and helps to move stock that may be needed for clearance items.
It's also a good idea when your supplier offers discounts for larger order volumes and you can purchase stock at a reduced price.
For example, grocery shops and retailers regularly encourage shoppers with quantity discounts such as:
- buy one get one free
- get $50 off when you spend $300
Value added offers
Without discounting the price, you can offer your customers an added value to their purchases.
Most value-add offers are a priceless item that's of benefit to the customer. For example:
- A computer hardware supplier could provide an installation guide, or free installation support with purchase.
- A hairdresser can offer a free treatment or blow wave with haircut.
These offers are a good way to identify any services you offer that your competitor doesn't.
Remember though that while some of these offers are free of cost, it might require your time or resources to provide the service.
Seasonal or periodic discounts
There are times of the year, month, week or day when some goods and services have less demand than other times. This is true for seasonal clothing, festive merchandise, travel bookings and restaurants.
By analysing your sales cycles and highlighting these periods, you can offer discounts for customers who buy merchandise or services out-of-season.
For example:
- restaurants offering mid-week specials or deals outside of the lunch or dinner rush
- surf shops offering sales of last season's stock over winter or ski shops offering the same discounts over summer.
See our pricing strategy page for more information about pricing products to meet demand.