Discounting – Do you really know what you are doing?
By Anthony Wilson
Everyone loves a sale, right? My question to you as a retailer is: Do you totally understand the ramifications that sales have on your business?
Firstly, discounting erodes margins. Yes, discounting is a part of retail, no questions about it, and for any retailer selling seasonal product there will always be duds and leftovers at the end of season. You have to get rid of them, but it’s how you manage that end-of-season product that determines the extent of margin erosion. You need to identifying slow sellers during the season and react by doing rotations or gift-with-purchase so you won’t have as much left at the end of the season and you won’t have to discount as deeply.
The arithmetic is simple. If you are a single store with say $1M turnover and you improve your finishing margin by 2% then you will have an additional $20,000 gross profit!
That’s why it’s so important to be on it with your buying and budgeting, but more about that another time.
Another discounting issue is storewide sales and the question is, why would you do it?
Unless you are really heavily overstocked and have a serious cash flow problem, it doesn’t make sense to do a storewide discount. Consider this; if your sales are $1000 in a day and your margin is 50%, then your profit is $500. If you do a storewide sale of 25% off your profit would drop to $250. So to get the original $500 profit your sales for that day need to be $2000. Yes, you need to DOUBLE your turnover to make the same profit. Now if your margin is 40% on a particular category then you need to sell $2670 or 167% more. Check out the table below:
Customer loyalty or VIP programs where you give 10% off are also problematic. As the table shows, you need to be 100% sure you are going to sell every single VIP customer at least 25% more to make it worthwhile. It is always better to reward customer loyalty with a value add rather than a discount.
Keep in mind that the table and example above doesn’t take into consideration additional wage costs to sell the higher volume of product, or to price the replacement stock or any freight charges. Not to mention the damage to your brand, as discounting also erodes brand value. Not only the brands you sell, but your store’s brand. What message are you giving your customers? Are you training or educating them to buy based on price? To only shop with you when you are on sale?
As retailers selling specialty branded products we sell the dream, not commodities. We need to compete on service, experience, the aspiration of the lifestyle and our brand values. Not price.
What do you think?
*Anthony Wilson is the Owner/Director of the retail stores, Saltwater Wine and Stormriders.
He is also the founder of SBIA and current President of the association.