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The Hultquist Blog

Discounts Are Like Cancer

As a business owner and entrepreneur, I understand the need for sales. Obviously getting that revenue is vital to the success of your business.

And it’s easy to fall into the trap of getting revenue for revenue’s sake. When your ultimate goal is revenue growth, and you focus so intently on new business and new revenue, you lose sight of what’s most important…and that’s profits and cash flow.

The same holds true if you have sales people. If they are paid commissions based on their sales only, they could be killing your business.

Let me explain.

When you focus entirely on sales growth, you naturally do all you can do to get that next sale…and that includes giving discounts on the price of your products or service.

Discounts are not evil in and of themselves, they can be a very effective part of an overall business strategy, such as to convert slow moving inventory to cash.

It’s when discounts are given for no other reason than to get that additional revenue.

Aside from cheapening your brand and giving the impression that you don’t have confidence in your product or service, discounts can become a cancer to your bottom line.

They seem innocent enough.

For example, let’s take the following scenario. Assume you sell a product that has a 50% gross margin, and your overhead is 20% of revenue. This means that if you have $100,000 in revenue, your cost of goods sold is $50,000 and your overhead is $20,000. This means your net is $30,000, or a 30% net profit margin.

Now, let’s assume you gave a 10% discount on those $100,000 of sales, so now your revenue is $90,000. Your cost of goods sold stays the same at $50,000, so now your gross margin is 40%, or $40,000. Overhead stays the same at $20,000, so your net is now $20,000 or a 20% net profit margin.

Seems simple enough – everything drops by 10%, but let’s take a look at the percentages. Your gross margin dropped by 20% and your net profit dropped by 33.33%! The even scarier thing is that to maintain your same level of net profit, your revenue would need to increase by 25%!

This simple little 10% discount wreaks havoc on your margins and profit, and makes you have to work twice as hard to maintain the same profit!

So, next time you are thinking about giving a discount “just to get the revenue,” stop and think about what this discount will really do to your business.

Sometimes sticking firm to your prices, or even walking away from the sale, is the better path to take.

To check what a discount will do to your bottom line, you can find an easy to use calculator here

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