Good discount, bad discount

A 20% discount (with a 40% gross) means you have to sell double the volume to make the same profit.

Yes, discounts are like cholesterol.

Bad discounts

Mostly, we hate discounts. Price slashing is the preferred promotional tool of the unimaginative, the lazy and the desperate. Discounts can boost sales, but they also slash margins and often end up earning a lower return.

If you have a 40% gross and you offer 20% off, you have to sell twice as much just for the same return: you would have to triple sales before you could say it was worthwhile. Did your last 20% off promotion triple your sales?

Those extra sales also come at a cost: they lower price perceptions. After a while, people expect them and may even hold off purchasing, waiting for the next sale to come around.

Good discounts

Good discounts increase the perceived value-for-money by adding value. They may include additional benefits. Or they may increase the size of the purchase (eg, second item half price). Or they may be a tool for encouraging brand switching (in which case the manufacturer should foot the discount bill, not the retailer).

Mostly the key is to add value rather than cutting price. Not only can this work just as well, but it avoids depreciating value perceptions of the product.

Good discounts can also occur where you actually buy better so your margin is preserved even though the retail price is reduced. End of model run-outs are an example.

A discount can also be good value for you if it is linked to extra volume. Second item and bulk purchase discounts work this way.

Non-discount discounts

A discount can be against the manufacturer's recommended retail, against market price or against your own previous sell price.

Some major discount stores offer big savings every day, mostly against rrp or market (and sometimes against a previous list price that was never promoted or even stocked).

It is a price discount, but not a margin discount.

In a true discount store, the prices promoted every day are in fact the prices they are aiming for, that deliver the margin they want. They buy in bulk and use other economies to enable a lower retail price, while still earning a margin appropriate to their costs.

Before you launch a sale that simply cuts your margin, consider if there are legitimate ways you can increase your perceived discount without slashing your margin.