As we head into Q4 and the season of promotions (Black Friday, Cyber Monday, Christmas deals etc) do you understand the impact that discounting has on your profits?
I always find that this is easiest to do with some examples.
*note -I am ignoring VAT for these so as to keep it simple.
Let's start with a business that sells a particular product for R50 and the costs associated with that product are R22.50. This means that the profit on that product is R50 - R22.50 = R27.50 which is a gross profit margin of 55%.
If a 10% discount is given then the product sells for R45, and the profit becomes R22.50 (R45 - R22.50) and the gross profit margin drops to 50%.
If a 20% discount is given then the product sells for R40 and the profit becomes R17.50 (R40 - R22.50) and the gross profit margin drops to 44%.
If a 30% discount is given then the product sells for R35 and the profit becomes R12.50 (R35 - R22.50) and the gross profit margin drops to 35%.
And if you go super-deep and offer a 50% discount then the product sells for R25 and the profit is only R2.50 (R25 - R22.50) and the gross profit margin drops to 10%.
These drops have massive impacts on your business because the costs below the line (i.e. your overheads - people, rent, advertising etc) do not change which means the lower profits at the top won't cover these costs and your business will move into a loss position, it will also have a negative impact on your cash.
But discounting (and deep discounting in particular) might be done for business reasons and the impact on the bottom line and cash may be an acceptable outcome for your business:
clearance of old stock lines to make way for new stock
a promotional offer that the supplier has agreed to and therefore they are sharing the cost of the discount with you by way of credit from them (ie they are part-funding the discount).
to build and extend your customer base.
So, just remember to check the maths on your discounts and make sure you aren't causing issues for your business further down the line.