A Dumb Discounting Mistake

Business
Reading Time: 2 minutes

By: Ruth King

 

A business owner noticed that sales were lower than expected.  He decided to have a sale to increase customer purchases.

His plan was to send out the sale notice to the company’s active customers and inactive customers who had purchased products within the past 3 years.  This list was over 5,000 people.

Since these customers had purchased from his company in the past, they were familiar with the company name.  His plan was to send emails and postcards as well as put the sale notice on his social media.

The next question was, what should the discount be?  He just guessed without calculating the effect of the discount. 30% seemed like a great discount to him.  He announced the sale with this 30% discount. The price to the customer went from $97 to $67.90. A bargain.

This company owner got a huge influx in sales.  Unfortunately he learned, after the sale, that the discount was too steep.

Here is the job costing for the product at the regular price.

  • Normal price is $97.
  • Cost of goods sold is $39.
  • Gross profit is $58.
  • Overhead is $30.
  • Net operating profit is $28.

 

Here is the job costing for the product at the 30% discount.

  • Sale price is $67.90.
  • Cost of goods sold is $39.
  • Gross profit is $28.90.
  • Overhead is $30.
  • Net operating profit is -$1.10

 

The cost of goods sold and overhead are the same whether it is the regular price or the sale price.

Net operating profit at the discounted price is – $1.10. The company loses on each sale.

Since he sold about 1,000 products, the loss was about $1,100!

Ouch!

He discovered that if he had lowered the price to $77, which would have probably resulted in similar sales, that the company would have made a small profit rather than a loss.

Before you offer discounts, make sure that discount doesn’t cause that product’s sales to be unprofitable after overhead is taken into consideration.

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