A 5% Discount Costs 100% of Profits?!
In the last post, I recommended calculating what a 1%, 2%, 5%, or 10% price increase would translate to in bottom-line profit for your business. We saw the pulley effect that pricing has on profitability. It works both ways: if small price increases have a large positive effect on profitability, small price discounts have a large negative effect on profitability.
Let’s see this using the same client example from the last post with 10% bottom-line profit (10% EBIT):
- A 1% discount translates to 10% reduction in EBIT.
- A 2% discount translates to 20% reduction in EBIT.
- A 5% discount translates to 50% reduction in EBIT.
- A 10% discount translates to 100% reduction in EBIT. As in, zero profit.
Just like in the price increase example, this is a 10X impact. Each percent price discount translates to ten percent decrease in bottom-line profit.
Consider this magnification effect the next time you consider offering “just a 5 percent discount” to a customer. Never offer discounts without knowing how much profitability the discount will eat up. Guard every percent of price like gold. It IS gold.
(This is the second of several blog posts that dive deeper into strategic pricing tips posted on 8/14/14.)