But one thing we might fail to ask – how much is that discount REALLY costing me?
Let’s explain with a little (very little) math. My Gizmos and Gee-Gaws both sell for $5 – it costs me $1 to make each Gizmo, but $3 for each Gee-Gaw.
So to sell a few more, I take 20% off the price of each. This is what the customer sees – a good deal, and so I sell a few more.
But what do I see? My Gizmo PROFIT has gone from $4 each to $3 – which means I’ve lost 25% of my profit, not 20%.
And my Gee-Gaws are even worse -I’m only making $2 profit on them before, so I’m down to $1 – and I’ve lost 50% of my profit!
Look at it another way – how many more will I need to sell to make the same profit? If I’m making 3/4 of the profit I used to on my Gizmos, then I need to sell 4/3 (or 133%) as many to make the same profit.
But for the Gee-Gaws – it’s horrible – I’ve lost 1/2 the profit, so I’ll have to sell 2/1 (200%) to make the same profit – twice as many!
If the math makes your head hurt, then just take a few principles away from this:
- Always do the math based on your profit, not your selling price.
- Discounts always cost you more than the customer benefits.
- Even when your profit margin is high, discounts can make earning that much harder.
So give discounts a try, but remember the math – and make sure your discounts count!
