Are you thinking of running a sale or special offer?
It can be tempting to run a discount to help you increase your sales volumes, get people to try your product for the first time or to help you shift old stock, but have you ever thought about how much it might costs your business?
Put quite simply, for every pound you discount your sales price by, you earn one pound less profit for your business. This is because when running a sale or special offer, all you're doing is reducing your selling price, the cost of making your product hasn't changed at all, just the income that you receive for every item that you sell.
If you normally sell a product for £10 and it costs you £5 to make it, your gross profit on that product is £5 for every unit that you sell. Your profit actually might be less than that because you have some administrative costs and overheads to cover but those are more difficult to measure so we tend to talk about gross profit when talking about the profit your make on an item you sell.
What happens if I offer a 20% discount?
If you're offering 20% off the price of a product that you usually sell for £10, you're actually only going to receive £8 per item sold with the discount. That's £2 less profit on every item, meaning that your gross profit will be £3 per product sold instead of £5 per product.
A rationale people often give for running a sale is that they'll sell more items and make more profit that way, and it's worth doing that bit of maths. Let's say you usually sell 100 items per month and generate £500 profit (that's £5 gross profit x 100 items), if you now discount by 20% and only make £3 gross profit per product, you need to sell 167 items to make the same amount of profit (£500 / £3).
What about 2 for 1?
If you're running a buy one get one free offer, you're selling every product for half of its usual price. This means a product which used to sell for £10 will now only generate £5 per sale, and with costs of £5 per item you'll make £0 gross profit per item sold, also known as breaking even, at these sales prices and costs, there would be no sales volume which would ever allow you to generate your previous £500 profit figure.
And 3 for 2?
If you're running a 3 for 2, you're reducing the sales price of every product by 33%. If you'd usually sell 3 products for £30, you'll now sell 3 products for just £20 in total, or £6.66 each, reducing your gross profit per item from £5 to £1.66. Want to know how many units you'd need to sell to match that £500 gross profit you used to make for every 100 items you'd sold? Divide the £500 by the new gross profit of £1.66, and you'll see that you'd need to sell 300 items.
Putting on a special offer might well increase your volume of sales, but it's important to keep in mind quite how many additional units you might need to sell to earn the same profits. If you're comfortable with making slightly less profit in exchange for higher sales volumes, still keep in mind the administrative costs and overheads your business needs to cover (not to mention paying yourself) when deciding how to set your prices. Heavily discounting does have it's place when you need to shift old stock or quickly get cash into your bank account, but never forget the cost of producing those items that you have for sale and keep the costs firmly in mind when setting your prices.