The discounts are one of the most used promotional strategies to achieve sales goals and increase market share.
The discount creates the mental image that a product is being purchased at the best price for a limited time, which stimulates purchase intention in the short term.
However, before calculating a discount and offering it with a view to increasing revenue, it is important to know the impact on profitability, and with it, decide whether or not it is convenient for the business.
To know how much it is convenient for you to offer a discount, you must have several elements on hand, such as the calculation of the breakeven point in units, the breakdown of fixed costs and variable costs, as well as the unit contribution margins for different types of sales.
The detail of fixed costs and variable costs in an input is of great importance when deciding whether to offer a discount, since fixed costs are the basis for an economy of scale; The higher the ratio of fixed costs to the total, the greater the need to drive sales and the greater the profitability when achieving the goals.
Before applying a discount
In addition to knowing the balance point and the nature of the costs, consider what the Government of the State of Victoria in Australia recommends, which ensures that before introducing a promotional discount strategy it is necessary to analyze in detail certain aspects of the business, such as:
- Sensitivity of the profit margin and breakeven point to the discounted price, at different levels.
- Different levels of discount that can be offered, while maintaining an acceptable profit.
- The design of a marketing plan created in conjunction with the discount program, with the goal of incorporating new customers and bringing inactive customers back.
- Analyze the competition and their promotion and advertising strategies.
- Assess the seasonal or cyclical behavior of sales, applying the discount strategy only in the event of falls in sales.
- The period of time in which the discounts will be applied, that is, consider that offering a short term can boost the purchase stimulus.
- Combine or evaluate other sales promotion strategies.
All these considerations must be taken into account to avoid adverse effects when offering a promotional strategy based on discounts to the sale price.
Studies have shown that if a business has a 40% revenue or gross margin and decides to issue a 10% general discount on its products and services, the strategy should boost its sales by at least 34% to avoid adverse effects. You can find detailed information on this at Business.vic.gov.au.
How does the discount work?
In every business, from the largest department store chain to the smallest convenience store, products are offered at a certain percentage discount, which means that the store will deduct a percentage off the original price.
When there are promotions in stores, a price reduction is generally offered, such as a 10 percent discount on all items, instead of publishing the already reduced price. In promotions with discounts it is common to see these types of labels:
- 10% discount (10% off)
- Save 10% (Save 10%)
- Take advantage of 10% discount (get 10%)
- 10% discount on selected merchandise (the most misleading).
The site Mathgoodies.com gives an example of this. Explain that if an item originally costs $ 15 and has a discount tag or is located on a shelf that says 10 percent off, this would be its final price:
- $ 15 dollars is its original price
- 10% will be the discount percentage
- and $ 13.5 dollars will be the sale price, after applying the discount.
Let’s look at the arithmetic of the calculations to get the 10 percent discount.
Calculate a ten percent discount
To calculate the price after the discount, you need to know only two pieces of information: the original value of the item and the discount percentage. You can then subtract the value of the discount to get the final price. This is the calculation procedure in the manual and simple way.
First: Convert 10% of a percent to a decimal, dividing by 100 to get 0.1.
Second: Multiply the total price of the object by 0.1 to calculate the amount or value in monetary terms of the discount. For example, if you want to calculate the 10% discount for a purchase of $ 130 dollars, you would multiply $ 130 dollars by 0.1. The result will be $13.
Third: Subtract the amount of the discount from the original purchase price to determine the value of the item, after the discount has been applied. To finish this example, you would subtract $ 13 from the $ 130. The final price of the product, already with the discount, would be $ 117 dollars.