The Disadvantages of Discounting on Your Business
Offering sale prices and discounts are prevalent practices when running a business.
Some owners offer wholesale prices or bulk discounts on large orders. For business owners who are excited to make a sale, you want to entice the customers by giving them what they feel is an excellent deal.
For instance, discounted pricing is rampant during major holidays, such as in the year-end months of November and December. These holiday sales seem to encourage people to spend more money than they were initially planning. However, it seems counterintuitive since the holiday season itself already gives consumers plenty of reasons and resources to spend more than usual. In the process, businesses may have moved more inventory, but they may have made less profit.
No matter the season, discounting in business has many disadvantages. If you are reviewing your financial statements with your small business accountant, and you’re feeling tempted to slash the pricetags, here are a few reasons your accountant might tell you that it could be bad for your business:
Selling to the wrong customers
When you give a discount, some customers will be drawn to your products only because of the promise of a fat price reduction. These customers may not truly appreciate what you have to sell. The wrong customers will also tend to purchase your product only when you offer it at a discounted price or, worse, may never buy again.
Downgrading your reputation
Offering your customers significant discounts gives them insight into how much you believe your product is truly worth. If your profit margins are not high, then you also run the risk of undervaluing yourself and making your business less sustainable in the long run. Also, if customers observe that you frequently discount your products and services, they may feel your pricing is not credible, and you may be overvaluing yourself.
Focus on price versus product
A truly great product or service should be business’s focus and not the price you sell it for. Affordability can be an asset when appropriate, but it should be a benefit of the product and not the reason for its being. When you discount, the highlight becomes how many dollars they can save rather than the strengths and benefits of the product.
In the process of discounting, you may have made a sale, but consider that you may have sacrificed much more. You probably have not garnered any loyal customers, and have negatively affected how people perceive your brand.
Discounting places more emphasis on how many items people can get, rather than how useful and effective your product is. As a result, the most significant disadvantage to your business is that you have made much less profit.
There might be situations where discounts are necessary, such as in damaged items, slow-moving inventory, or stock that is nearing expiry. Cuts should be given sparingly, and often, businesses offer them to reward and sustain customer loyalty. However, reducing prices should never be part of any business owner’s primary strategy.
It is crucial to review your business goals, and if discounting is hurting or helping it. Consult your business accountant on your accounting strategies if there are any benefits to your bottom line. You may be able to improve your cash flow in the short term, but you won’t be able to build a healthy, bankable, and sustainable business in the long run.
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