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Discounting Into Oblivion?

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I went out for dinner last night and what struck me within minutes of taking our seats was the number of promotions on offer at the restaurant. If we had been going to the theatre, we could have had 20% off just for showing our tickets. If we signed up to a mailing list, we were in with a chance of winning either £1,000 or a case of champagne. The 3-course fixed price menu was cheaper than one of our main courses. As it was, one of the only reasons we were eating at that particular restaurant was because they had sent me a “Two for the price of one” voucher in my email (I’m already on the list).

My experience of the restaurant trade is incidental; I know far more about being a customer than a seller. Nevertheless, I do know that it is one way to lose a lot of money very quickly without doing much wrong. I don’t think the restaurant I visited is in any danger of shutting down any time soon, but I did question the wisdom of having so many money-off deals on at a time.

For any business, offering temporary discounts is a good way of shifting stock, getting customers through the door, and, if you do it right, keeping your cash flow healthy. The danger, however, lies in coming to rely on such promotions to drive your sales. If, when you are setting up your business, or are going through a tight patch, you offer lower prices to gain customers, you may find that the same people are unwilling to pay when you decide to change to your higher “proper” prices. This is especially the case as the economy still struggles to recover and consumers are more careful with their spending.

The temptation then, could be to keep the promotions going, in the hope that the level of sales will compensate for the lower marginal profit on each item. But if you can’t guarantee a certain level of sales, you could find yourselves in all sorts of trouble. If your income from these discounted sales fails to cover overheads, you’ll be essentially be subsidising your customers’ shopping, which will lead your business in to debt, and eventually failure. You could have the best product in the world, but if your customers are not willing to pay what it’s worth, you’re not going to make any money.

A few years ago, sales were simple. Christmas and summer would be the times when stores would offer low prices on old stock in the hope of shifting it so that they had room for the new season’s stock. Today though, with new stock appearing in some stores on a monthly or more frequent basis, it’s seems that there is always a sale on. And recently, the sales racks in my favourite stores have been taking up more floor space, to the point I don’t really need to look at the new stuff to revamp my wardrobe.

I don’t think any of my usual clothing stores, or the restaurant I visited last night are in any danger of shutting down. All are parts of national chains, where tricky trading conditions in one are can be offset by better-than-expected sales in another. For small independent businesses, however, discounts may seem like a good idea for generating sales, but is a strategy that is fraught with danger. Raise prices to soon and customers might disappear; keep them low for too long and you’re promoting yourself out of business. Pricing is more alchemy than science at the best of times. When times are tough, it’s important not to let discounting become the factor that tips a business over the edge.

[Image by JaimeLondonBoy]

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