You might think that offering discounts is a great strategy to use when sales are falling.
In reality, you’re likely to be more profitable by holding your price and accepting the reduction in sales volume than discounting a product.
Let’s look at an example to show the difference in your gross profit if you discount your selling price by 10% compared to holding the price at £100 and accepting a 10% reduction in sales volume.
- If sales are currently at 10,000 per annum at £100 per unit, your sales will be £1,000,000. With costs of £60 per unit, your gross profit is £400,000.
- Dropping the selling price by 10% might mean sales remain constant at 10,000 with a selling price of £90 per unit, so you’ll achieve £900,000 in sales. Costs remain at £60 per unit, so your gross profit will be £300,000.
- If you were to accept the 10% drop in sales but hold your price at £100 per unit, your sales revenue will still be £900,000, but you’ll only have to pay for 9,000 units, so your gross profit will be £360,000.
- In other words, holding your price and accepting the drop in sales results in a reduction in gross profit of £40,000 compared to a £100,000 reduction if you offered a 10% discount.
If you look at it another way, you can work out the increase in sales needed to maintain your original £400,000 gross profit if you offer a 10% discount.
- To calculate the increase in sales required, first calculate the gross profit for each unit: £90 selling price – £60 cost per unit = £30 gross profit per unit. This gives us a gross profit percentage of 33.33% (£30 gross profit / £90 selling price * 100).
- To calculate the required increase in sales, multiply the previous sales volume figure by the gross profit percentage. To maintain your £400,000 gross profit, you’ll have to sell 13,333 units (10,000 units * 133%).
Discounting is simply not the answer – it’s a race to the bottom!
Look for other alternatives to respond to a drop in sales – starting with what you can do to delight your customers so they keep coming back.