Increase Profit with Discount Pricing

Right out of Sam Walton’s lesson book:
“…. by cutting your price you can boost sales to a point where you earn far more at the cheaper retail price than you would have by selling the item at the higher price. In retailer language, you can lower your markup but earn more because of the increased volume.”
Sam Walton: Made in America by Sam Walton with John Huey

Sam Walton – founder of Walmart and Sam’s club continues to profit from this philosophy today. Of course he coupled it with ambition and a wife who was just as eager for him to succeed as he was. Walton committed to buying everything direct from the manufacturer – in bulk. The profit was all his.

However beware – if you are offering high end products there is a fine line between offering competitive discounts and altering the reputation of your product. Some items call for the higher markup. Customers who can pay the higher price will with the belief that the higher price equates a superior product. Sometimes price is associated with prestige. For instance, owning a Harley Davidson bike is a sign of success.. if you can afford a Harley – you must be doing pretty well!

Before price cutting, consider the market you are trying to reach. Consider the image of your product and promote your product accordingly.

To explore price cutting, revisit that simple CVP Calculation from posting “Profit 101” earlier this week:

Profit = (Sales-Variable Costs) – Fixed Costs

Don’t forget – Taxes are subtracted out of your profits
Variable costs are actual cost to produce or your cost per unit
Fixed costs are just that – costs you have even if no units are produced

You can manipulate the calculation to figure out how many units you would have to sell to reach the profit you want. Be sure to calculate any additional promotional or marketing costs for your price cutting campaign…

Units = Fixed Costs + Profit / (Selling Price Per Unit – Variable Cost)

3,000 sandwiches = ($2,500 + $5,000) / ($4.00 -$1.50 )
So lets say you have a sandwich shop. You are used to making $5,000 profit per month by selling 3,000 sandwiches at $4.00 each. Business has slowed due to a recession and workers that have not been laid off now take their lunch to work more often instead of buying your sandwiches. You are selling fewer sandwiches and making less profit. Can you win your customers back by price cutting to $3.00? How many more sandwiches will you have to sell each month to keep your $5,000 profit?

5,000 sandwiches = ($2,500 + $5,000) / ($3.00 - $1.50)
You would have to sell 5,000 sandwiches.

Selling 2,000 more sandwiches in bad times might not be realistic. So you make some changes in your costs by getting a better deal on insurance, putting in energy efficient lighting, buying paper products in bulk (from Sam's Club) …. Now you only need to sell 4,000 sandwiches a month. You know that this discount will win many customers back, plus you forecasted an increase in sales as you also begin to target hungry job seekers .

4,000 Sandwiches =($2,000 + $5000) / ($3.00 - $1.25)

Give it a try on paper first.. there are also some great on-line calculators to help you out --
here are a couple of them... good luck!

http://www.steinermarketing.com/calc_break_even.htm
http://www.fast4cast.com/break-even-calculator.aspx

You are invited to share your experiences with price cutting- did it work for you?