The impact of discounting on your business

How Discounts and Price Increases Can Impact Your Business’ Bottom Line

Are you considering offering a discount or raising your prices? While it may seem like a quick way to attract more customers or increase profits, it’s important to understand how these strategies can impact your business. In this post, we’ll explore how discounts and price increases can affect your bottom line, using easy-to-understand examples.

Let’s start with discounts. Imagine you run a small business and decide to offer a 10% discount on your products/services. Your net profit margin is 20%, which means you make 20 pence of profit for every pound you sell. However, with the discount, you’re only making 10 pence of profit for every pound you sell.

To maintain the same profit margin, you would need to sell 100% more products! So you need to sell more products/services to make up for the lost profit. This can be a daunting task, especially for small business owners. So, before offering a discount, it’s important to understand its financial impact on your business.

10% increase in your prices can increase your profit by 50%!

Now, let’s consider price increases. Suppose you decide to raise your prices by 10% instead of offering a discount. Your net profit margin is 20% again. If you had for round numbers a £50,000 profit on £250,000 of sales (20% net profit), an increase of 10% to your price will push your sales to £275,000. You will now have £75,000 profit as it all hits your bottom line! That’s a 50% increase to your profit from a 10% increase to your prices!

You have basically increased your net profit margin from 25% to 30% which has increased your own profit by 50%.

However, it’s crucial to remember that raising prices isn’t always the best option. You need to understand your market and customers to determine whether a price increase is feasible. On the other hand, offering discounts may not always be the most effective way to attract customers. You need to balance the potential benefits against the financial impact on your business.

Inflation

Also remember the impact that inflation is having right now. It is as high as 10%, so you need to increase your prices by around 10% just to stand still…

In conclusion, discounts and price increases can have a significant impact on your bottom line. By understanding the financial implications of these strategies, you can make informed decisions about how to price your products or services in a way that benefits your business in the long run. So, before making any pricing decisions, take the time to consider their impact on your business’s bottom line.

The 5 Levers of Success

We have been working on helping our clients see the ‘levers’ that drive their cash and profit increases. In the example below a 10% compounded increase in the 5 main areas of your business finances would increase the profit in this business by over £100k along with the cash.

This may seem too good to be true but we have seen this kind of impact with clients. It’s so important to understand what changes need to be made to get the results you desire in your business.

Email me stephen@cheltenhamtaxaccountants.co.uk if you want to see how we can help with this in your business.

Watch the impact of these small shifts by clicking on the image above or HERE