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One way to increase your profits is not to give discounts and here’s the reason why.
Businesses give away profit by discounting. Every business has given away a discount at some point. You know what happens, a customer takes a sharp intake of breath and tells you, “that’s too expensive”, so you take 10 percent off the price.
The trouble is businesses fail to understand the consequences of giving discounts. When you give a discount you are giving away money and usually a lot more than you think.
For example, say you are selling widgets for 0 and the cost per sale is so you have a 40% margin. Now if you give away a 10% discount what happens is you are now selling the same widget for just , so your margin reduces to .
So what have you effectively done by giving away in real terms a 10% discount? You haven’t given away 10% of your profit, once you’ve done the maths you’ve given away 25 percent of your profit. But more alarming if you decide to run your business like that you will have to go out and get more customers just to make the same profit.
In our example of a 40% gross margin and a 10% discount that is a 25% reduction in profit or you need a third more customers. So for every three customers you have you need a fourth one just to make the same money you would have made.
In contrast if you put up your prices by 10 percent, you have a profit on a 0 sale so a 25% increase in profit and by definition you could have fewer customers and still make the same money.
So these are the choices on your 0 widget.
Give a 10% discount and see a 33% reduction in profit
Give a 10% discount and work a third harder for the same profit
Increase prices by 10% for a 25% increase in profit
Increase prices by 10% and only sell 4 widgets instead of 5 for the same profit.
When you look at the consequence of making that 10% change, either up or down, you can see the actual change in your profit is magnified considerably. Understanding that can make a huge difference in your profitability.
The take away is do not give a discount if you can avoid it because if you can close that drip in the bottom of the bucket you can make the bucket fill a lot quicker and therefore generate more profit more easily.
For more details about Duncan and his company follow this link http://www.tannahillpartnership.co.uk
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Find out more on Business Development in this Wikipedia article: http://en.wikipedia.org/wiki/Business_development
Listen to Professor Colin Eden’s personal view on the Strathclyde MBA:
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