Discount dangers

Discounts are a good way to generate business and win new customers. However, business owners need to understand the impact to profitability and ability to deliver excellent customer service. Don't PRICE yourself out of business. If a discount is not going to lead to more profitable business or customers, it may not be worth doing.

A 10% discount costs more than you think. As an example, let's look at a simple comparison:

Sell Price         $15.00            $13.50      10% discount
Direct Cost      $10.00            $10.00
Margin             $  5.00            $  3.50       30% reduction in margin

In this case, a 10% discount on sales price [$15.00 - (10% X $15.00) = $13.50] produces a 30% reduction in margin [($5.00 - $3.50)/$5.00 = 30%] and margin is king. You need to have enough margin to support your overhead and pay yourself or stockholders a reasonable profit.

Understand your costs and value in the marketplace and PRICE your goods and services accordingly.