In a tough economy, Canadian small business owners may be tempted to offer store-wide discounts as a way to attract customers and boost sales. However, while discounts can bring in new customers, they can also erode your profit margins and damage your brand image. In this blog post, we’ll explore the hidden costs of store-wide discounts and show you 3 different ways you can increase your sales and maintain that important profit margin.
The Hidden Costs of Store-Wide Discounts
When customers see a discount, they may be more likely to make a purchase. However, offering discounts can come with hidden costs that impact your bottom line. Here are a few of the costs that Canadian small business owners should be aware of:
- Reduced profit margins: Offering discounts means selling products for less than their usual price, which means that your profit margin decreases. This can be especially damaging if your profit margins are already thin.
- Reduced perceived value: When customers get used to seeing discounts, they may start to perceive your products as being less valuable or of lower quality. This can be a difficult perception to shake, even when you stop offering discounts.
- Reduced brand image: When customers expect discounts, they may start to see your brand as one that is cheap or desperate. This can be damaging to your brand image, especially if you have worked hard to establish a premium or luxury brand.
The actual cost of discounting
It’s proven that a discount of 10% is enough to increase your sales. As for the impact on profits of offering a 10% discount, it will depend on your profit margins and how many products you sell. Here’s a quick example to illustrate the impact:
Let’s say you sell a product that costs you $50 to produce, and you usually sell it for $100. Your profit margin is therefore 50%. If you offer a 10% discount, you’ll be selling the product for $90. Your profit margin is now 44.4%. That means you’re losing 5.6% of your profit margin on every sale.
If you sell 100 of these products with the discount, you’ll make $9,000 in revenue, but your profits will only be $4,440. That’s a difference of $560, or 12.6% of your original profits.
So, while offering a 10% discount might seem like a small change, it can have a significant impact on your profits. It’s important to weigh the benefits and costs of offering discounts carefully and consider other marketing strategies that can help you drive sales without eroding your profit margins.
3 ways you can avoid discounting
- Increase your marketing spend to attract new customers
- Create bundles of your product or services
- Offer buy now pay later installment plans
Attracting new customers will increase your sales and help you maintain your sales price. Every business is different, so attracting new customers will have a different cost depending on your own situation. You can run ads on Google or Facebook, you could distribute flyers, or you could put new signs outside your building. Each of these options are marketing-driven, and have an upfront cost. So whilst you may win new customers, you have to spend first before you see those new faces in the door.
Bundling products and services
When you combine your products and services you can share the profit margin across a few items and ultimately maintain an average. This is great if you have a high margin product you can include, however you are asking your customer to spend more. So in a tight economy this may not yield the results you’re looking for. It’s definitely worth testing, and you could test it in a very cost effective way simply by mentioning a bundle when your customer is checking out.
Introducing Buy Now Pay Later
If you haven’t heard of buy now pay later, you’re not the only one. It’s a new take on lay-away, and is a payment method that allows you to get paid up front, and your customer to pay over time. It will help you increase your sales without eroding your profit margins. Buy Now Pay Later allow customers to pay for their purchases over time, rather than all at once. This can be especially appealing for customers who are struggling financially but still want to make a purchase.
Here are a few reasons why customer installment plans may be a more profitable alternative to store-wide discounts:
- Higher profit margins: With BNPL, you can still sell your products at their usual price, which means that your profit margins won’t be eroded. In fact, you may even be able to charge a premium for offering this payment option.
- Increased perceived value: By offering BNPL, you’re sending a message to your customers that you’re willing to work with them to make a purchase possible. This can increase the perceived value of your products and your brand.
- Enhanced customer loyalty: By offering BNPL, you’re also building a relationship with your customers. When they make a purchase using BNPL, they’re committing to buying from you over time. This can lead to increased customer loyalty and repeat business. And with every installment they pay, they see your logo in their inbox. It’s free advertising to existing customers for 6 weeks!
While store-wide discounts can be tempting in a tough economy, they can also come with hidden costs that erode your profit margins and damage your brand image. Customer installment plans offer a more profitable alternative that can help you attract customers, increase your perceived value, and enhance customer loyalty. By implementing BNPLs and communicating their availability to your customers, you can drive sales and maintain a strong, profitable business.