Should I give my client a discount?

Got a phone call from a friend on Friday.

She supplies uniforms to hotels.

She had a potential new customer who was pushing hard for a discount.

She was asking me if she should give it.

Now in this situation many people give a discount because they believe that otherwise the sales might be lost.

Especially in the last few years with downward pressure on prices, the temptation is even greater to give a discount.

Now each business owner must decide for themselves what to do in this situation.

Back to my friend in Dublin.

Now I don’t know her profit margins but I went through some numbers with her.

Imagine for a moment that these are the numbers for a typical business.

Total Sales 100
Total costs 80
Profit 20

Believe me, I’m being generous here because the profit element is even smaller for most businesses but let’s go with these numbers for now

Now if she gives a 10% discount her numbers will be.

Total sales 90
Total costs 80
Profit 10

The selling price will drop from 100 to 90, her costs stay at 80 so her profit will drop from 20 to 10.

That is a 50% drop in her profits.

Many people don’t realise this but any change to our selling price goes straight to the bottom line.

Or to put it another way, if she gives everybody a 10% discount, she will have to find double the number of customers to achieve the same profit.

Conversely if she increased her prices by 10% her numbers would change to:
Total Sales 110
Total costs 80
Profit 30

Her profit would increase from 20 to 30, that’s a 50% increase in profits.

Now many people would say that you cannot put up your prices in the current climate but I have worked with 2 businesses who have increased their prices in recent weeks with no adverse effect.

Rather than give a discount, try to give the customer something extra that has a high perceived value but has a small cost to you.