The impact of discounting

by Profit and Cash Flow

Have you ever considered the impact of discounting on your bottom line? So you want to improve sales on a particular revenue stream, product or service. What can you do? For many, the default answer is to discount, it’s the easiest option and it works right?  Not necessarily. The problem with discounting is that any discount you give a client comes straight off your bottom line. What’s worse is that if your gross margin is less than 60%, discounts can really hurt, and you’ll need to sell significantly more volume to have the same amount of gross profit in the bank. To help you understand the impact of discounting let’s look at a specific example. Let’s say you sell 100 widgets for £100 each and your gross margin is 35%.   100 widgets x £100 = £10,000 Cost of widgets  = £6,500 i.e. 35% gross margin = £3,500   If you applied a 10% discount in this scenario you would lose £1000 and that would come out of your pocket.   100 widgets x £90 = £9,000 Cost of widgets  = £6,500 i.e. 35% gross margin = £2,500   In fact you would have to increase your sales volume by 40% just to get back to your £3,500 gross profit.   140 widgets x £90 = £12,600 Cost of widgets  = £9100(£65 each x 140) £12,600 – £9,100 = £3,500   Discounting is not something that I encourage my clients to do. It can exacerbate cash flow and result in you working harder for little or no gain. Unless you can expect a massive increase in sales volume you might be better off finding more creative ways of improving sales.