When you’re thinking of discounting a product there are a number of questions you need to ask yourself. If you’re not certain of what you’re doing, you’re making less profit for no reason.
First of all you need to ask what is the purpose of the discount. It should have a definite reason, such as:
• liquidating old inventory,
• getting a newly launched product off to a good start,
• increasing market share,
• putting the pressure on weak rivals or discouraging new entrants.
You also need to work out the numbers. A discount will not necessarily make more profit. If you have a $20 product and your gross profit is $8, you might want to lower the price by 10%. With $12 in production cost, if you lowered the price to $18, your gross profit is cut from $8 to $6, or 25%. So you’ll need to sell 25% more volume to break even.
That’s a lot more volume. If you are a new entrant to a product area, you may find that the discount is enough for customers to decide it’s worth trying out your product even though they usually buy a different brand. That could make it worth while discounting.
In the same way, if you have seen a number of new entrants coming into your sector, a short sharp discounting campaign might make them think better of launching new products. However, if they reduce their prices to compete, you’ll have lower profitability in future. That’s the risk you take.
How are you going to present and publicize your discount? Just reducing the price isn’t enough. You need to attract people’s attention, and you need be able to get people excited about it.
This is where it can help to think about who in particular you’re targeting as new customers. Here are a few ideas:
• customers who usually use another product, but might use the discount to try yours;
• customers who usually buy cheaper products, but might buy yours if the price is reduced;
• new customers (banks and credit cards often offer better terms to new customers);
• customers who bulk buy.
You might also want to think about who you don’t want to see the discount. For instance, if you’re offering a special deal to new customers, you might want to try to advertise it in such a way that as few existing customers as possible see it. Or if you’re offering a deal only to customers in certain states, again, you want to try to stop customers who don’t qualify from seeing it.
Couponing and the use of discount sites is a great way to help keep your discounts focused. Existing customers probably won’t see your discounted stock unless they’re members of the site or actively clip coupons.
Finally you need to be able to monitor whether the discount worked. Did it bring in the expected increase in sales? Did it shift your inventory? Even when you’ve ended the discount campaign, you should be checking whether sales fall back to the pre-discount level, or whether you’ve managed to retain the new customers you brought on board. If you’ve expanded your customer base long term, then you can see the lower profit on discounted stock as an investment – but only if it actually works!