Businesses continually offer discounts because they think more sales somehow equates to more profit. But that is never the case. Higher turnover doesn’t lead to higher profit margins; it only puts your company at risk. Reducing pricing can have many adverse effects.
Let us look at some of them.
Your Profit Margins Get Hit
When you reduce pricing for your products, you’re only making your sales department work harder to make up for the difference. It is a no-brainer that your profit margins are higher when you sell at full price. So, for every discount you offer, you need to make more sales with future sales. It is important to remember that the sales made from your discounts are never going to add up to the money you lost. Tread water cautiously and consider how much revenue you’re going to lose here.
What Happened to your Cash Flow?
When you mess with the pricing of your products (or services), you’re inadvertently messing with your cash flow. Discounting will only cause more issues with cash flow. It creates a long-term problem where your company will continue operating on the bottom line alone. So, you will be surviving, but you won’t be thriving. And this creates a vicious cycle. The more you reduce prices, the more it’ll affect the survival of your business. Essentially, you’ll be feeding on yourself until there is nothing left. Told you it wasn’t sustainable.
Your Value and Image
Pricing tells a customer: This is what a product is worth. It says, all the hours of hard work, design, creativity, manufacturing costs add up to this particular number. When you sell it at a discount, you say, I can compromise on all that work; the worth of my product changes as you wish–maybe it doesn’t have a stable value. Naturally, this tarnishes the significance of both your product and your company. Discounting doesn’t inspire confidence at all. And that is you want in your customers—for them to be confident about you. So, focus on what your product or service deserves—and ask for that. People who see its quality will pay for it.
Discount Twice and You Never Stop
Your logo, your marketing, your packaging, your services—they all set a tone. They convey a specific message about your business. So, pricing establishes your tone, too. When you offer discounts all the time, you’re known as the business that offers discounts all the time. It sets expectations. Chances are customers won’t buy anything from you when you’re not offering discounts. It damages your opportunities in the future when you’re trying to increase profits and create revenue.
To understand if discounting is right for your business, you need to look at the whole picture. When you sell more, you have to make more. It seems like a good thing until you realize you’re not selling at the price you’re supposed to. Look at all the costs, even the small ones. The small costs are always the ones that add up in the end and deliver the final blow. Assess how thin your margins are because it’s likely, you can’t afford to give out the discounts you are.