Everyone loves a bargain. With Black Friday and Cyber Monday on the horizon many businesses are now adopting the strategy to offer huge discounts on their products/services. However,In this episode of The Fearless Business Podcast, host and coach Robin Waite reveals why this could prove detrimental to businesses.
With Black Friday and Cyber Monday on the horizon, many entrepreneurs are looking into offering huge discounts on their products/services. Of course, discounts are a great way to generate awareness for your products and get more people interested; however, most business owners don’t realise that they can prove highly detrimental to their overall net profit.
In this episode of the Fearless Business Podcast, Robin breaks down some myths surrounding discounts and offers his opinion on why entrepreneurs shouldn’t involve them when selling their core services/products.
Discounts are an enticing way to attract customers to your business. But, when combined alongside what Robin deems as an unrefusable offer, they aren’t the worst thing.
However, according to Robin, discounts only serve as a benefit if the entrepreneur is aware of the theory surrounding them. There’s a key phrase surrounding discounts:
“Discounts create a cheap product which is a loss leader that simultaneously maximises customer lifetime value.”
Essentially discounts are a double-edged sword. They are great for attracting more customers to your business, but they don’t help towards scaling and freeing up capacity in your business. Ultimately, they don’t create an increase in net profit and more than likely decrease it. Contrastingly, when paired with a product that isn’t your core, they can prove to be an excellent mechanism for introducing a customer to your brand, which enhances a business owners chances of getting them as a full-time customer further down the line.
From Robin’s perspective, the biggest mistake most business owners make when it comes to discounting is applying heavy discounts to their core products. Of course, this is okay when it’s not done continuously and instead in moderation. However, most business owners don’t realise that a simple 5% discount on their core product translates to a 50% decrease in their overall net profit.
Most small business owners generate an estimated 20% net profit from their products/services. So, if an entrepreneur applies a 15 - 20 % discount overall, they are simply eradicating all their profit just to attract customers. It’s not worth it!
When offering a discount, the best foot forward is to offer the discount as part of a “job lot” of combined services from your business. Robin highly emphasises that entrepreneurs should strictly keep this discount at the 5 - 10 % mark.
Why 5 - 10 %?
A common myth associated with discounting is that if you discount by 5%, you only need to generate 5% more profit to break even, which is completely untrue. Instead, Robin suggests that entrepreneurs need to gain a complete picture of their profits and losses before even considering offering a discount.
Let’s assume that 100% of an entrepreneur’s net profit immediately goes into a funnel consisting of operating costs, overhead expenses and direct cost of sales. You’d be quick to notice that your overall profit will be eroding fast, creating a compound effect as the same profits will also be going towards wider expenses within your business. This then leaves you with a net profit of 10 - 20 %, as outlined previously, before you even take the discount into consideration.
Finally, you apply the 5% discount and realise that when combined with your net profit of 10%, you pretty much have reduced your net profit by 50%
This is why entrepreneurs need to be more in the know about discounting. It’s a sure-fire way of attracting customers to your products/services but leaves little to no opportunities for business growth as you are increasing your customer base without increasing capacity leaving your business stretched and overworked.
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