When you’ve got a lack of cash in your business what do you do?
It can be tempting to offer a discount or have a sale to get some money in.
I’d almost always advise exactly the opposite – put your prices UP instead!
This is why …
What happens when you discount?
Discounting can be the death of many businesses that don’t realise how badly this destroys their profits.
Here’s an example using a product that you normally sell for £100 each, making £10 profit on each sale.
Number of products sold = 100. Price = £100. Total sales = £10,000
Profit on each sale = £10. Total Profit £1,000
Discount prices by 5%.
Get an extra 20 sales
Number of products sold = 120. Price = £95. Total sales = £11,400
Profit is now £5 on each sale. Total Profit = £600
Although your revenue is up, your profit drops dramatically!
What happens when you increase your prices?
Increase prices by 10%.
Let’s assume 80% of customers still buy from you (in reality it will probably be at least that).
Number of products sold =80. Price = £110. Total sales = £8,800
Profit is now £20. Total Profit = £1,600
In this case your revenue drops but your profit has increased significantly!
Remember your goal is to increase your profit – not just add sales revenue that doesn’t generate profit.
You’d need to sell 320 products at the discounted price to get the same profit as selling 80 at the increased price.
Another reason to increase your prices and avoid discounts
As long as it makes a profit there is no right or wrong price for anything.
Price is a perception of value.
By discounting you’re giving out the message that your product or service is not worth as much as you previously said it was. Once that perception is in the minds of your customers, it’s very hard to get back to selling on value.
On the other hand, putting prices up shows confidence that what you’re offering is great value.
You might lose a few customers, but they’re likely to be your worst customers – the ones that don’t appreciate you, the ones that don’t pay on time, the ones that give you headaches.
Wave them goodbye and concentrate on building up the customers that don’t buy on price, the ones that know you’re giving them great value!
(Please note, these examples are used for ease of illustration. To assess the real impact in your business, you need to know your profit margins, whether there are economies of scale and many other factors. If you have any doubts about how to increase the profits in your business, contact me and I’ll be pleased to help – but please, always think twice before offering a discount!)