Are you discounting your prices post Covid-19? Wait – not so fast!

As many states are about to reopen their economy, business owners are likely busy trying to figure out the new normal, and how to restart the economy in their own corner of the world.  Likely, many business owners have had time to strategize about their business – what works, what doesn’t, what should we do differently, etc.

Also, it is likely that business owners have planned sales or discounts upon their return to business.  Is that a good idea?  Maybe/maybe not.   Does the price and discounting really drive behavior? Is it long-term or short-term? Hopefully, you’ve done the research to make sure before going down that path vs. other ways to boost your business.

The first thing to understand is your breakeven point during a sale or promotion.  There are people who would have bought anyway at the non-discounted price. By offering a lower price to these people, you’ve reduced your profit to them.  Hopefully, you make it up by getting others, though. In the following chart, you can see some examples.  For instance, if your business only makes a 20% margin, and you reduce your price by 10%, you need to sell double (100% increase) whatever this product or service is just to make even.

My first hope is that if you are a 20% gross margin business, that you have thought long and hard on how NOT to be a 20% margin business.  How can you be a 25% margin business or a 30% margin?  What value can you add? Have you really understood the customer value you provide and are you monetizing that as best as possible?   After all, if you’re going from a 20% margin to a 30% margin gross margin, you could sell 1/3 less and still make more money than you could at 20% margin.  Less work and more money? Sign me up for that!

My first hope is that if you are a 20% gross margin business, that you have thought long and hard on how NOT to be a 20% margin business.

But let’s think about that – most service businesses run at around 20% in my experience.  Giving them a 10% lower price will mean that you will have to chase 50% more business!   To make this more concrete, let’s play this out:

Pre-Covid 19, you sell 10 customers a week a service that is priced at $100.  That’s $1000 in revenue.  Your costs are $80 each, and so you make $20 gross profit.   Multiplied by 10, that’s $800 in costs and $200 in gross margin profit.   

Post-Covid 19, you offer to sell 10 customers a week at a service now priced at $90 or 10% off.    That’s $900 in revenue.  Your costs are $80 each still, and so you make $10 gross profit. Multiplied by 10, that’s still $800 in costs and only $100 in gross profit.   You need to sell 20 now to make the same profit.  

Let’s say you do no price promotion, and you only sell 7. What happens?  $700 in revenue.  Your costs are $80 each and so you have $560 in costs.  That leaves $140 in profit.  In other words, your profit is now higher than it would have been with the promotion!

The moral of this story is not to sell 7.  Is it realistic to sell 20 after you’ve been averaging 10? Is that a productive use of your time?  Where will you find these new customers? Are there enough hours of the day to even be possible?

Instead of doing a price promotion, are there other ways to offer a promotion?  Here are some ideas:

• Can you cross-promote with a complimentary business where you offer samples or a swap to get your business new exposure? This can be as simple as a flyer in the storefront of another business.
• Can you offer gift cards?  Anywhere from 2 – 20% of gift cards go unredeemed each year. If you don’t have them, you should.  Gift cards also help your best customers share the secret of your business with others new to you!
• Can you offer additional services and expand your offerings? Most businesses can be expanded via complementary parts. If you have a construction business, can you offer design services?  Can you offer to pack and mail purchases as gifts for a fee?

Let’s say those don’t work.  Rather than just giving a straight $10 discount, perhaps you can get something in return.  For example, rather than giving a $10 discount, perhaps

• Can you offer a discount only if they buy a second service they normally don’t buy?
• Can you offer that 10% discount but only if they do a referral or bring someone new who buys their service from you as well?   This gives a discount to your loyal base but allows your service to be experienced by someone new.
• Can you offer a 10% discount if they prepay for next week today?  Or, can you offer a discount of 10% if they prepay a month ahead of time?  This will at least help with cash flow, which is what most small business owners are dealing with right now.

These are going to be tough times for many businesses, no way about it.  No answers are easy, but I’ve seen many people just go with a better price or a sales event – it’s easy -- and let the chips lie where they may with no forethought.  If you offer price promotions, just go in with eyes wide open.  Most people manage revenue, while they should be managing profit. You don’t want to think that price is a great lever when it might have been better to not offer a price discount or a non-price sales promotion.  

This is another in a series of Linkedin articles that delves into the mystical and magical world of product and pricing and their impact on profits. I welcome your comments and feedback. Let's get a dialog going -- do you have a good story to share? Please do so!

I work as a consultant helping companies maximize profits through better marketing, selling, and pricing. If your sales and profits are out of whack – or you don’t know where to begin - we should talk! I've worked with some of the biggest corporations and smallest individual businesses out there. I’m also a small business owner myself. Contact me.  You can read more about my work at my LinkedIn profile or at my website: https://www.dukeofprofit.com