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Discount strategies

Know how to offer discounts and specials and still make a profit

On this page

  • Business planning before discounting
  • Discounting prices will alter your profits and sales targets
  • Consider other sales offers
  • Benefits of discounting in your business

Planning before discounting

Discounts, loyalty offers and bulk buy pricing is common business practice and can help you to move stock, attract new customers, or reach sales targets during a slow sales period.

Before you start cutting your sales price in half in the hope of drumming up sales, it's good to do some planning to make sure you're still making a profit for the extra orders coming in.

It is important to:

  • know your current profit margin, markup and breakeven point
  • calculate the best discount price to still make a profit
  • prepare a marketing plan to encourage new customers and bring inactive customers back
  • find out what your competitors are offering and their current pricing
  • review other options for promoting sales offers without reducing the price
  • decide how long the sales price will be offered
  • review your accounts for any regular times of the week, month or year your business has a sales dip.

Marketing plan template (DOCX 140.2 KB)DOCX icon

How discounting affects your sales targets

Whenever you alter the sales price (and markup) of your goods and services it is important to understand how this will affect your profit margins and sales targets. To successfully run a sale without making a loss you should know your gross margin, markup and breakeven figures and how the discounted price will affect your profit.

From the table below you can use your gross margin figure (top row) to see how much your sales volume will need to increase (middle cells) when using different discount amounts (in the left hand column).

Example: if your gross margin is 40 per cent and you decide to discount your goods or services by 5 per cent, you will need to increase your sales volume by 14.3 percent in order to make a profit.

Checking the effect of discounts on the gross margin
If you cut your prices by...  and your present gross margin (%) is...
0% 15% 20% 25% 30% 35% 40%
5%   50.0% 33.3% 25.0% 20.0% 16.7% 14.3%
6% 150.0% 66.7% 42.9% 31.6% 25.0% 20.7% 17.6%
8% 400.0% 114.3% 66.7% 47.1% 36.4% 29.6% 25.0%
10%   200.0% 100.0% 66.7% 50.0% 40.0% 33.3%
12%   400.0% 150.0% 92.3% 66.7% 52.2% 42.9%
15%     300.0% 150.0% 100.0% 75.0% 60.0%

Special offers and pricing deals

If discounting isn't working to drive sales in your business there are other options you can offer your customers.

Example: if a five percent sales discount did not encourage more orders, offering free gift wrapping or shipping might be a more successful promotion. It is important to understand your customers and what offers they will be attracted to.

Package or bundle stock

This type of upsell opportunity encourages customers to order more stock or services and are rewarded with a bundled pricing. Bundling works when the customer can see the benefit of complimentary products or services and buying them together at the discounted price.

Example: within a beauty salon bundled offers could include a discount for buying shampoo and conditioner at the same time, or having a manicure and a pedicure.

Quantity discounts

Offer a percentage discount or 'get one free' when customers buy a set number of items. This increases the size and value of customer orders and helps to move stock which may be needed for clearance items. It is also a good idea when your supplier offers discounts for larger order volumes and you can purchase stock at a reduced price.

Example: grocery shops and clothing retailers regularly encourage shoppers to buy one get-one-free, buy five get-one-free, or buy one and get the second item at a reduced price.

Value added offers

Without discounting the price you can offer your customers an added value to their purchases. Most value add offers are a priceless item that is of benefit to the customer. It is important to remember that although some of these offers are free of cost it may require your time to provide the service. These offers are a good way to identify any services you offer which your competitor doesn't.

Example: a computer hardware supplier could provide an installation guide, or free installation support with purchase. A hairdresser can offer a free treatment or blow wave with haircut.

Seasonal or periodic discounts

There are times of the year, month week or day when some goods and services have less demand than at other times. This is true for seasonal clothing, festive merchandise, travel bookings and restaurants.

By analysing your sales cycles and highlighting these periods you can offer discounts for customers who buy merchandise or services out-of-season.

Example: mid-week specials for restaurants, surf shops offering sales of last season's stock over winter, and ski shops offering the same discounts over summer.

Benefits of discounting

Along with increased order numbers and more money, discounting benefits include:

  • attracting new customers without a large marketing campaign. You can also take the opportunity to sign new customers up to your newsletter
  • encouraging undecided customers to purchase goods, especially if the discount has a limited time offer
  • clearing last season's stock, or out-dated models
  • free advertising on sales websites
  • new sales from inactive customers.

Case Study: How to discount for business growth

'Auldstone's discounting works because it caters to their target market'

Michael Auldstone, Auldstone Cellars

Read more about How to discount for business growth

Michael Auldstone standing next to a car with Auldstone Cellars wines in a box in the boot of the car