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Why discounting can be a trap



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The economics of sales promotions

Not all sales promotions were created equal. Some eat into your profits more than others. Learn why.

3 types of sales promotion

  • Discounting – 25% off

  • Sweeteners – Buy this, get that too

  • Bulk deals – Buy two, get one free

How discounting crushes your profits

Discounts are perhaps the most common form of sales promotion, but there are traps. A seemingly harmless discount will eat up your margin.

20 percent discount
20 percent discount
20 percent discount
20 percent discount

 

You can see how a generous profit margin will vanish at the hands of a far more modest-sounding discount. Discounts essentially give away cash. Think hard before choosing that route.

Discount vs sweetener vs bulk deal

A good sales promotion should be of high value to the customer, and low cost to the retailer. By that measure, bulk deals and sweeteners often fare better than discounts.

Imagine you’re designing a sales promotion for a $150 deck chair (which cost you $75 wholesale). Here’s how the three different approaches might compare.

Choose your promotion carefully

In this example, the 25% discount provides the least reward to the customer, and hits profit the hardest. It doesn’t always break down like this. The final numbers will depend on your markups. But do your homework (and some maths) before committing to a promotion.