At the time of writing this blog, the business world is in turmoil due to the impact of the COVID-19 crisis. As a result, we have been looking at various situations with clients on how they can react best to not only survive, but thrive (where possible!) in this climate.
One topic we are discussing a lot with clients is pricing.
Namely, where our client feels that maybe the price of their product or service could be discounted.
This is often because the client feels that this will make them more competitive, or to help drive sales.
We are going to show you why you *might* not want to leap straight to discounting.
Here’s an Example:
- In an average month a client sold 50 items at £100
- Each item cost £60 to make
- Therefore the client makes a £40 profit on each item
- When selling 50 items, they made a profit of £2000 (before any other costs)
If you discounted the price to £80 per item, you would need to sell double to make the same amount of money.
The Impact of Discounting
- Can your business generate double the sales if you started discounting your price by £20?
- Do I have the capacity to serve that, even if it could get the customers?
- Could your business work on lower profits for a shorter period because it needs to generate cash?
The Opportunities in Discounting
Discounting isn’t a bad thing by default, however.
In fact, if you know what you are doing and the impact on your business, it can be a good tactic and is used by many businesses.
Cash in the bank is often better than profit in your accounts, especially in periods of crisis or uncertainty.
Sometimes you may start discounting without knowing the above issues, because it will generate immediate cash which you need.
We have seen plenty of profitable businesses that have come close to liquidation because they couldn’t generate cash, and some unprofitable ones that can continue to trade for long periods because they have cash flow to work with.
So, what should I do?
Our point is, make sure you run the numbers and really understand the impact of changing your price.
There may be other creative ways you can think of to either change the way – or frequency – you’re paid to help keep that cash coming in, or consider how you can reward loyal customers.
Do also consider the perception of dropping your price too readily – if you quote an initial figure and then start discounting the price by a significant amount, will your customers see the true value of the original price? Or will they become wary of the quality of your products?
If you need some help with understanding the impact discounting might have on your business, get in touch with the team – we’d love to help.