What’s the purpose of discounting?
Thinking about doing a little bit of discounting? Let’s talk about that for a minute.
If you want to discount any particular item, what are you trying to accomplish?
This is not rhetoric. There truly needs to be a point to discounting, and before
you presume that I want to bash the entire concept, let me say that I honestly
have no problem with it. But like everything else, there must be a reason.
Which of your goals is discounting, say, sweaters moving you towards?
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Charging $1.25 for laundered shirts every day does not fit the bill for several
reasons.
Let’s say that your price for laundered shirts is $2.25. Let’s assume that you do make an acceptable profit at this price point. You realize,
perhaps by mining your POS database, that only one customer in 10 uses your
laundered shirt service.
If you could get more customers to try your service, then maybe three out of 20
would use your shirt service, thereby increasing your profit margin. (Remember,
you show a profit at $2.25 per shirt).
Let’s say that this increase in volume would somehow net you an additional $10,000
per year in net profit. What are you willing to do for ten grand? Actually, ten
grand a year perpetually?
Would you pay $5,000 for that? Why not? In fact, it’s worth far more than that. Jingle up $5,000 and somehow end up forever taking
in an extra $10,000 per year in profit. Sign me up.
It takes this kind of thought — careful thought — in order to decide how to invest $5,000 so that by spending it, you end up far
ahead.
One of your options may be to discount shirts for a short time, perhaps a
marketing scheme aimed squarely at those current customers that aren
’t aware of how great a professionally laundered and pressed shirt looks.
Please note that I said “discount shirts for a short time.” It is completely senseless to discount shirts — or any item that you work so hard to produce — long term. It is suicide, in my opinion.
So through careful database mining, you hope to get a bunch more customers
trying out your shirt service, finding out that it is truly worth $2.25, and
becoming customers for life at full price. At full price, of course, because
your service and quality and convenience has clearly convinced this new
customer that the discounted rate was exactly what it was supposed to be: a
seductive enticement to try a new service that you offer.
The seduction may work perfectly and, hopefully, what you have sold is a product
that really is clearly worth more than you charge. If you drop the ball on
service and/or do a lousy job, your quest for more business will backfire. For
this discussion, let
’s presume that you do a good job and give great service. Let’s do the math.
At $2.25, you make a 50-cent net profit per shirt.
You do 3,000 shirts per week.
This means that you make a tidy $1,500 per week profit on shirts alone.
By careful use of a well designed cost calculating spreadsheet….
[Time out. You can not do anything with regards to discounting if you don’t know your cost per piece, your profit margin, the number of pieces that you
process, how much you make on each one, what your fixed costs are, what your
variable costs are and perhaps some other things. You have
“no business” (hey, that’s a pun) discounting if you don’t know what you’re doing now. None.]
By careful use of a well designed cost calculating spreadsheet, you learn that
your profit per shirt would increase to 57 cents per unit if you were doing
3,800 shirts per week.
That would increase your profit from $1,500 per week (3,000 times 50 cents) to
$2,166 (3,800 shirts times 57 cents each). What are you willing to do for an
additional $34,000 per year?
It’s all about goals. I’ve said this over and over again. The goal here is to increase shirt profit by
$34,000 per year. How are you going to accomplish that?
Remembering what your goal is — and you always have to remember that — discounting shirts forever is far beyond foolhardy. Perhaps your philosophy,
some of you will argue, is that we discount the shirts
“to get the drycleaning.”
This is equally senseless. Your drycleaning must be able to stand “on its own two feet” so to speak. If you really think that your customers bring you their
drycleaning simply because your shirts are cheap, you have a big problem. So
big, in fact that you shouldn
’t be reading an article about discounting shirts, you should be reading an
article on how to be a better drycleaner and a better business person. Really.
If you want to use an item as a loss-leader, use sweaters. It makes far more
sense than shirts. Think about it.
So, back to your goal of increasing shirt laundry profits by $34,000 per year.
The route to that is to increase shirts by 800 per week, while maintaining (or
even improving) quality and service. Forfeiting all of your shirt laundry
profits for a limited time may be a route to your ultimate goal. But not
forever!
Hypothetically speaking now, you could go all out, maniacally promoting shirts
for 60 days. Window signs, brochures, website photos and descriptions for those
that want to learn what shirt laundering is all about. You pull out all the
stops. Maybe you offer shirts at an amazing discount of five or six shirts for
$10.
All of these schemes cost money. All of them, from the window sign to the loss
of revenue and complete loss of shirt profits. But the difference between this
and generally selling shirts below cost at all times is immense. The revenue
enhancing power-play that I describe has a measurable goal and purpose. How
well will it succeed? I don
’t know, but you will, because the only way that you can do it is to monitor it
very carefully. Otherwise it is a huge waste of time and money.
Discounting does have a place in this business. It has a purpose. That purpose
is to increase profits, not decrease them. Not ever.
If you do what you've always done, you'll get what you always got.
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