How do you keep your business from drowning in the sea of competition? Do you join the price war by discounting?
Answered by:
Value over price, yep. Supply chain woes, yep. Pride, yep. Labor, yep. All good excuses, but horrible reasons.
There are lots of great reasons to be cautious about discounting. The #1 reason is pure math.
If your margin is 30% (not markup) and you discount 10%, then you have to sell 50% more to achieve the same margin. BTW...your margin is your profit!
This is a math problem above all. If you are having to discount in order to sell, then a different conversation should be had. Also, if you are using mark-up, then there is a high likelihood you don't know what your margin actually is.
I see many business owners, especially the early stage enterprises that believe in discounting "just to get our name out there".
What happens in 100% of the cases is that you run out of money faster and cannot recover.
Another example:
If you "just want to get your name out there" then you may only have a 20% margin goal. Then you discount 10% and guess what, now you have to sell 100% more to stay at a 20% margin.
Do the math. It just might keep you out of the poorhouse!
Conversely, what if you raise your prices?
Let's start at 20% margin.
You price increases by 10%
Your sales would have to decrease by 33% before your profit is reduced.
It's not magic, it's math...but it works like magic!
BOOM! Great advice Steve.