Discounting Danger

11th October 2012

A business associate recently rang me because he was worried that his business wasn’t moving forward as expected, and although he had won a number of new customers, and his turnover was on target for the year, he was concerned that he was no longer making profits. It didn’t take long to spot that his cost of sales percentage had risen alarmingly over the previous 9 months, but what was it that had caused this? The answer to this also soon became evident.

Essentially this was a successful company which had grown considerably over the previous 12 months, and had taken the decision to press on forward by setting challenging targets for the next year. However, in doing this, they had sub-consciously allowed themselves the leeway of offering discounts to fuel this growth. In the current economic climate when clients are always asking for better prices, and with new leads tempting you by promising you the business, providing your “price is right”, then we can often succumb to this strategy. “Pile it high and sell it cheap”, but in reality this seldom works unless you really have the clout to buy cheaper, and the volume of stock turn which allows you economies of scale. The result more often than not is that we end up becoming “busy fools”, working twice as hard for the same, or very often, worse returns.

Lots more sales at lower margins can clearly increase your turnover, but your profits will invariably stay the same or worsen. However, more annoying than that, is if your sales do not increase significantly, then your profits will drop significantly, and as in the case above, can drive you into a loss making position.

One other thing to remember on this front is to keep on top of your figures. Had they spotted this 6 months earlier they could have largely avoided this problem altogether, whereas now they have some losses they could probably have avoided. On the plus side, at least they did spot it, and have taken immediate and positive actions to reverse this trend. No doubt they will soon be making good profits once more.

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