The Hidden Costs of Discounts: What Small Businesses Need to Consider Before Slashing Prices

In the world of small business, the allure of offering discounts can be powerful. It seems like an easy way to attract customers, increase sales, and compete with larger companies. But before you decide to cut your prices, it's crucial to understand who really misses out when you offer a discount and whether your business can sustain the reduced profit margins.

Who Misses Out in a Discount?

When you offer a discount, it might seem like a win-win situation for both you and your customers. However, the reality is often more complex. If your profit margin is 30% and you discount by 25%, you're left with a mere 5% margin. That sliver of profit has to cover all your operating costs—rent, utilities, wages, and more. If you're already working with tight margins, that 5% might not be enough to keep your business afloat.

The Sacrifices You Make on the Back End

When you reduce your prices, you’re not just sacrificing profit; you're also putting your business's sustainability at risk. With a thinner margin, you have less cushion to absorb unforeseen costs, such as rising rent, utility bills, or the cost of goods. If your margin is already slim, you might find yourself struggling to cover essential expenses like fuel for deliveries or even your own food and living costs.

Why Are You Discounting?

Before offering a discount, ask yourself why you're doing it. Is it because your profit margins allow it, or are you hoping to boost sales at any cost? If your markup is minimal, slashing prices could do more harm than good. However, if your markup is generous, you might have some room to maneuver without jeopardising your business.

Special promotions like AfterPay Day or PrimeDay can be effective, but they need to be approached with caution. These events are designed to generate a high volume of sales in a short period, which can justify a temporary reduction in margins. However, consistently offering discounts without considering your margins could lead to financial strain.

My Personal Experience with Discounts

I recently offered a 50% discount on my professional fees, despite my better judgment. As a service-based business, I don’t have stock to hold or suppliers to pay, so my costs are relatively low. However, I quickly realised the value of my work and the impact of halving my rate. In essence, I was devaluing myself and the services I provide. While the discount attracted new clients, it also left me questioning whether it was worth sacrificing my worth.

Stick to Your Worth

Ultimately, you set your prices because that’s what you believe your products or services are worth. Stick to those prices. Discounts can be a useful tool when used strategically, but they should never come at the expense of your business’s viability or your own self-worth. Before offering a discount, take a hard look at your profit margins, operating costs, and the long-term impact on your business. Only then can you make an informed decision that benefits both you and your customers.

Discounts are not inherently bad, but they require careful consideration. Make sure your business can sustain the reduced profit margins, and always remember the value of your work. By being conscious of your pricing and the impact of discounts, you can protect your business while still offering value to your customers.