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The Secrets of High Profit Price Discounting

Sometimes when I go out to speak, crazy things happen--- and the last time was no exception. A couple of weeks ago, I was asked to speak to a group of business owners on the subject of sales promotion. Everything went along uneventfully until I got to the part about discounting. One well-intentioned gentleman was obviously laying in wait for me with a very pointed question. It was one I’d heard a dozen times before, so I was ready. But it caught the rest of the audience a bit off guard and seemed to even make them even gasp a little. Here’s what he asked me:

"I’m tired of speakers coming in here and telling us to give our products away for free just to get more business. My margins are thin enough as they are now without any more coupons. What are you going to tell us that’s any different?" "Fair question" I responded.

  

Then asked him what he sold. He answered, "We sell a line of western wear--- cowboy clothes--- directly to consumers by mail and the internet." Here was my answer back to him:

I told him that the secret to profitable price discounting is to present the prospect with an offer designed such that if they buy it, you make more money than you would on a normal sale. Let me explain this business growth strategy...

Let’s say that one of his shirts normally sells for $42, and that he pays $21 each for them. That’s a gross profit of $21. ($42-$21) If he takes the standard path and simply price discounts the shirts 30%, that reduces his gross profit on each one to just about $8.40. That’s before he pays for printing and postage. Pretty dismal!

Why not restate his offer to read… "Buy Two Western Shirts at $43 each and Get One Free?" If the customer goes for that deal the seller makes $23 on the sale ($86-$63=$23)… more than if he would have sold one shirt at full price! Both he and his customer are happy with the transaction. But this also does something else very important that may well help reduce his overall sense of frustration about his mailings. His margins were too low to gin with. He clearly had no room to discount even from the start. Direct mail operators should be selling items for at least three times what those items cost at wholesale. While this example gets him closer to that rule of thumb, it doesn’t get him all the way.

Another price discounting technique is to modify your sales mix to boost margins. Here’s something I did several years ago when I was handling the marketing for some seafood restaurants. Their regular shrimp dinner sold for $4.39 back then. The food cost them was $1.67, leaving a gross margin of $2.72 on each one sold… the highest gross margin of anything in the restaurant. What we did was add 3 additional pieces of shrimp at a cost of 20 cents each--- and raised the price to $4.99. We basically sold the extra 3 pieces of shrimp at our cost to shift our sales mix toward the highest margin item on the menu. It worked beautifully. We had our most profitable month ever. After that, we repeated that promotion whenever we could.

Business Growth Strategies:To profitably price discount, think about the dollar and cent profit on each item as opposed to just managing the percentage margin. Also consider what can you do to encourage the purchase of higher dollar margin items. One way to do this is to bundle impulse purchases with your regular offer by reducing the price on a second, related item that they usually don’t buy. This leads us to an important point. If you sell just one product, there is no way you can "bundle" it with anything else. Often a wider set of offerings can help yield higher profits!