More Money For Shoes author Melissa Browne reveals the bottom line cost of discounting.
I was surprised to learn in a recent Roy Morgan survey, that the number of Australians shopping online has now hit 50 per cent, with Gen X being the biggest online spenders.
Perhaps the rise in the Australian dollar will slow this down a little but it appears that Australians are now comfortable with the concept of shopping in their PJ’s. And an entire generation in their 30’s prefers to shop online rather than hitting the shops.
Many retailers think the answer to this online drive is to discount pricing rather than lifting the customer service in their bricks and mortar stores or heading online themselves. Sure discounting may push up your sales in the short term but it’s important to understand the effect a decision like cutting prices can have on your bottom line.
So what is the true cost of discounting?
The table below may look confusing but it demonstrates how many additional sales you need to make if you offer a discount, simply to make the same amount of profit as if you hadn’t discounted the price.
For example, let’s say Mary owned a clothing store. She has a 60 per cent gross profit margin on her clothing. So if an item of clothing was selling in the store for $100 then the cost of that item would be $40 and Mary’s gross profit is $60.
Mary usually makes $1,000 worth of sales per day with a gross profit of $600. But she’s concerned about a competitor selling cheaper online so she decides to react by discounting her clothing by 20 per cent. However she still wants to make the same amount of gross profit so she can pay her bills. Using the table below, we can see that Mary needs to make an additional 50 per cent in sales in order to make the same amount of profit that she did prior to the discount. That means her daily sales needs to increase to $1,500.
The table may be eye-opening but it’s important to understand the consequences that decisions such as discounting, have on your bottom-line.
Discounting or having a sale can be a great tool to let new customers test your product or to move old stock but it is not necessarily a great long-term strategy and certainly is a dangerous knee-jerk reaction to customers buying online. Instead, it should be thought of as a tool along with great customer service, understanding your market, communication and of course heading online yourself.
For more pricing tools head to Jeans and Pricing under the Shopping List Items at www.moremoneyforshoes.com.au