Math of discounting

Over the course of running your business, you might be tempted to discount your products. After all. Coupons and sales can cause an uptick in purchases and provide you with a temporary hit of revenue. However. Giving our significant percentage discounts in to only cheapens your brand but can hurt your profit more than you may realize. For example, a 20 percent discount can cause an 80 percent decrease in profitability.

Here is how. Let us say you sell a product for $100 with a 50 percent margin. Your product costs $5 to ship and you typically get 100 orders per day. Doing the math, you make $45 profit per sale. If you get 100 orders per day that is $4,500 per day, you now need to generate 180 sales. Intuitively, you think that you only need to make 20 percent more dales to cover your 20 percent coupon when in fact you need to make 80 percent more sales just to make the same amount. This is why you must be care full when offering coupons and discounts because they can have a tremendous effect n your bottom lined. Unless you can generate twice the sales you normally get, it is often nor worth running a sale.

The same math applies when you raise price. Applying the dame example, let us say you decide to raise your price by 20 percent. Your new profit per sale is $65 per sale. By raising your price 20 percent, you need to generate 30 percent less sales to make the same amount of money. This is why raising your prices will almost always exponentially increase your profits. We want to learn to work smarter, not harder.