Using discounts for your business can be very effective but when not done right can lead to diminished profits. If you’re considering using discounts in your business, also consider planning discounts strategically and craft a program that meets your financial goals.
Read through the bullet points below for tips on how to apply discounts and protect profits at the same time.
Define the Purpose
Before considering discounts, ask yourself why are you applying discounts in the first place.
There are a number of reasons you may want to run discounts:
- To attract new customers
- To encourage repeat customers
- To sell surplus inventory
- To Increase sales
- To bring back old customers who haven’t shopped your products for a long time
Different goals signal different methods. To attract new customers you’ll want to determine the profit margin of your discounts against the customer acquisition cost. On the other hand, to win back repeat customers you’d need to scale profit margin losses against the lifetime value of the customer. For increasing sales, you’ll need to calculate how much you can discount your products without affecting your profit margin while selling surplus inventory doesn’t affect this at all.
For calculations on customer acquisition costs before, during, and after discounts see visit The 4 Customer Metrics Every Business Should Track.
Different Discount Offers
These methods can be applied together or separately.
- Discounts on individual products
- Buy one get one free
- Bundled discounts (a few products offered together with a discount)
- Seasonal discounts
- Free shipping on sales of X amount and up
- New customer discounts
- Volume discounts (i.e. if the customer is buying 5+ items)
- Returning customer discounts
- Refer a friend discount
The method you use depends on the goal you are trying to achieve.
Picking a Discount That is Still Profitable
Discounts can cut into your profits. In order to avoid this, calculate these variables:
- Break-even point: Divide total fixed costs (rent, utilities, labor, insurance, property taxes, etc.) by the contribution margin (revenue generated from per sales after subtracting general costs).
- Break-even units: Divide fixed costs by the revenue per unit minus the variable cost per unit.
- Break-even price: Divide the fixed costs by the number of units you expect to sell to find the fixed costs per unit.
Tip: Use low budget marketing methods such as social media platforms, which are mostly free and won’t affect your cost margins.
The numbers from your calculations determine how many sales you will need to stay profitable.
You may want to consider taking a business loan, or a line of credit to make sure your profits are still high.
Celeri Network offers business loans for businesses with over $100K of annual revenue.
Using discounts for your business can be very effective. It’s important to analyze your products and your customers as this will inform the discounts you should be offering and when you should offer them as well. Discounts can help your business attract new customers and returning customers which makes up most of your revenue growth.
For tips on getting returning customers visit How to Get Returning Customers