The ABCs of Discounting, Part 1

Discounts are everywhere you look. From pizza to automobiles, discounting appears to be an effective tool to sell products.

But how wise is it to cut prices below your normal markup?

There is one main goal behind discounting: increasing sales. You make less on each item sold, but you hope to make up for it with volume.

That volume can come from three sources:

• You may attract customers away from your competition by offering a better price.
• You may attract non-floral customers to make a flower purchase by offering better value than other gift choices provide.
• You may lock in present customers' future business with a good incentive.

No matter which group a particular promotion targets, the object is to increase sales and, ultimately, profits.

Discounting Dangers

Of course, cutting prices has its down side. You have to be careful how much you discount. It wouldn't make sense to sell something at a lower price to a customer who already was going to buy at the regular price.

The first thing to remember about discounting is that it is the least creative way to compete in the marketplace. After all, anyone can cut prices.

You are far better off setting your products and services apart from those of your competitors. Emphasize your superior service, guarantee, freshness or design style… and charge full price.

Discounting can lead to price wars. It can do permanent damage to your ability to charge properly for your products and services. Once you start, it is often difficult to stop.

Many customers buy only on the basis of price. Be careful before you decide to target them. You'll never have their loyalty. They will leave you as soon as a better price appears.

Is There a Profit in Discounting?

It's a good question. If the average retail florist only makes 5 to 7 percent on the bottom line, how can you make any money offering a 20 percent discount?

It's because of a concept called "incremental contribution." An example from the travel world will illustrate how it works.

Think about hotels for a minute. Suppose a hotel is about to go through the night with vacant guestrooms. How much additional cost would the hotel incur if someone used one of those rooms?

The answer is "almost nothing." In other words, whatever they could get the customer to pay for the extra room would increase revenue and profit. Some contribution is better than no contribution at all.

Limiting Discounts

To offer discounts effectively, you need to limit who gets them. Otherwise, your regular customers will just get products and services on the cheap — and you will end up losing money.

Think about how you can restrict your offer.

For example, suppose you want to increase your holiday plant sales, but you don't want to hurt your profitable individual consumer business.

You might offer a discount for someone who buys in quantity. The larger the order is, the larger the discount would be. You could also put restrictions on when the order must be placed. Reward the early birds who help your holiday planning.

These would be perfect restrictions to get business customers to give plants to their employees, suppliers or customers.

Additional restrictions on when deliveries are made can allow you to fit them in when things are slower. For example, you could guarantee delivery during a particular week before the holiday but not on a certain day.