Death by Discounting

Markup %	Margin %
25	20.00
30	23.08
33	24.81
35	25.93
40	28.57
45	31.03
50	33.33
55	35.48
60	37.50
65	39.39
66	39.76
70	41.18
75	42.86
80	44.44
85	45.95
90	47.37
95	48.72
100	50.00

Discounting your products and services can be lethal to your business. Not only can it start a pricing war with your competitors (in which nobody comes out a winner) but try getting your customers to gladly pay full price once the discounting frenzy is over. Add this to the huge chunk of profit that you have just thrown away and well.....need I say more!

  As you can see from the chart above, there is a very big difference between mark-up and margin and unfortunately many business owners do not understand the difference.  Before you decide to offer a discount on your goods and services you need to have a clear understanding of the impact it will have on your bottom line.

Discounting can have a devastating effect on the profitability of your business.

So, lets take a nuts and bolts look at what happens when you get into the discounting mode in your business.

You purchase an item from your supplier and it costs you $20 - that becomes your Buying Price (also known as your cost price or wholesale price). 

If you were to mark-up this item by 66% (%mark-up) you would multiply the buying price by 1.66.  This would give you your Selling Price (SP) of $33.20.

So this is what it looks like as a calculation

- $20 (BP) x 1.66 = $33.20 (SP)

Now this is where a lot of people tend to get things mixed up.  If you look at the chart above you will see that a 66% mark-up is in fact a margin of only 39.76%.  That means that you are making a profit of 39.76 cents in every dollar sold - not 66 cents as many people believe.

Here's how it works.

Selling price = $33.20.

Profit = $33.20 - $20.00 = $13.20. (This is referred to as your Gross Profit)

Margin = ($13.20 x 100) divided by $33.20 = 39.76%. (The same as in our table).

This is why discounting is a major headache.  When you calculate a discount it is always a percentage of your selling price.

This is what is looks like:

Selling Price = $33.20

Discount of 20% = .20 x $33.20 = $6.64

Your Gross Profit = $13.20 (from our previous calculation)

Hold on - if you calculate how much you have just given away is has worked out to be 50.3%of your profit - that's over half!

Here's how it looks.

($6.64(Discount) x 100) divided by $13.20 (Gross Profit) = 50.3%.  That means over half your profit has been given away by just a measly 20% discount.  Imagine what a 25% or 30 % discount will do to your profitability.

This is the same kind of calculation you would use when calculating a percentage bonus on retail sales for staff incentive bonus's. Tread with great caution!

Many sales rep's do not understand the difference between mark-up and margin and will merrily tell you that their products have a 66% margin when in actual fact they mean a 66% markup (which is just under 40% margin). 

You need to be able to make this calculation for yourself.  If you don't know how to, make it a priority to learn it ASAP.

Pam Stellema is a  Specialist Coach for Small Business Development.  Her area of expertise lies in coaching and motivating small business owners, managers and their key staff towards maximising productivity and profits, excellence in customer service and client retention, and recruiting and retaining key staff. Pam can be contacted on 0431 975515, 0755 296 426  or to visit her website go to www.pamstellema.com.au

An important message

While every effort has been made to provide valuable, useful information in this Newsletter, I and any related suppliers or associated companies, accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.