Discounting Yourself Out of Business

Our friend Michelle Chance-Sangthong wrote this article for Stompernet and we felt it important to pass along.

We live in a time when we want and often need to stretch dollars further because everyone wants a deal. And who can blame them? When you sell retail goods, it’s very easy to get in price wars, and truly those are often only a “race to the bottom”. Listing the best price will get you more customers, but it may not bring you more profits.

Businesses are making PERMANENT DISCOUNTS a regular part of their “marketing”, and not just a part of a sale or special offer. Most entrepreneurs reading this will never be able to compete on the scale of a big box retailer, yet they try to price themselves like one.

Last year at a family dinner we were discussing business changes, and my brother-in-law (naïvely) suggested that we could just lower our prices a bit too attract more sales. I agreed with him that a discount might encourage more customers, but that didn’t necessarily put more money in the bank. He comes from the service industry and handles only a few customers per week at maximum capacity. In a business like ours, where we sometimes process 100’s of orders a day, such a decision could prove deadly.  After a lengthy discussion I decided to put together a spreadsheet to see the true costs of discounting, and I was SHOCKED at the results.

To keep the math simple, I used these basic assumptions for an online retail business that ships physical products at a keystone markup (double cost):

  • Retail Price = $20
  • Product Cost = $10
  • Gross Profit on order of 1 item =$10
  • Gross Profit on 100 Orders of 1 item = $1,000

To clarify, this is not about “volume” or “bulk” discounting, it’s simply an exercise to consider one customer purchasing one product one time.

Take a look at Chart 1. Offering a 5% discount you’ll need to sell 11% more to make equal profits of selling at no discount. For an ecommerce retail business it means, instead of processing 100 orders to make $1,000, you’ll have to process 111 orders. Because that gap grows exponentially as the discounts get deeper.
For an ecommerce company that ships their own products it means more costs, too:

  • Inventory Storage (Facility)
  • Pick & Pack (Labor)
  • Packaging Materials (Boxes, Paper, Tape)
  • Customer Service (Labor)
  • Order Management (Labor)

If you “drop ship” only, you still have costs like:

  • Drop Ship Fees
  • Customer Service
  • Order Management

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