Dangers of Discounting
February 19, 2008
The urge to discount should be continually resisted.
Don’t destroy your business in the mistaken belief that higher turnover equals more profits. That slash and burn approach to pricing has led many businesses to a sad ending.
Before you ever lower a price, get out your calculator and do the sums. You may be stunned to find out how much extra work will be required to make the same profit.
A simplistic example may help illustrate the point.
1. Assume I do ten $10,000 jobs where I make a 30% margin and it results in $30,000 net profit from all ten jobs.
2. If the practice of giving a 10% discount on each job became entrenched (or my discounts over the next ten jobs averaged $1,000), the result would be:
* a net profit of $20,000 for the next ten jobs; or
* doing 15 jobs to again have a net profit of $30,000.
| Jobs | Revenue | Cost | Net Profit |
| 10 | $ 10,000 | $7,000 | $ 30,000 |
| 10 | $ 9,000 | $7,000 | $ 20,000 |
| 15 | $ 9,000 | $7,000 | $ 30,000 |
What a stark truth! If I regularly give a 10% discount, I have to do 50% more work to make the same amount of money.
Of course, this is all based on a margin of 30%. Discounts pose an even greater threat if you are trading on slimmer margins.
Not only will you have to work harder to maintain profits, but your costs may significantly increase due to the extra work. Not only will staff and equipment costs rise, but numerous less obvious costs may also have an impact. Take the time to work through those hidden costs to see just how much the extra work is really costing and examine just how thin your margins really are.
No company can sustain extended periods of discounting. Well established companies may give the appearance of heavily discounting, but don’t be fooled by their marketing. If the discounts are genuine they can only offer them because of large buying power, switch selling or they have the rare good fortune to be selling high margin products.
You can be sure that any successful trader long ago learned how to make money and is not in the business of giving it away through uncontrolled discounts.
If a discount is to be offered, use it for a special purpose like clearing old stock. Or, if you are a service provider, link the discount to the job’s margin and not the overall fee revenue. Just imagine how magnified a “little” discount can be if it applies to the whole revenue.
In summary, uncontrolled discounts are commercial poison. Don’t routinely discount unless you ready to enjoy early retirement.
| Photo by CarbonNYC |
Failure Statistics
February 17, 2008
While any statistics deserve a measure of cynicism, these stats may provide some interesting indicators of positive commercial trends.
The Small Business Administration identified the overlapping causes for small business failure in the United States in 1999.
It released the findings of its “Financial Difficulties of Small Businesses and Reasons for Their Failure” study.
The causes identified were:
- outside business conditions (38.5%)
- financing (28%)
- inside business conditions (27.1%)
- taxes (20%), disputes (18.8%)
- personal calamities and other (32.9%)
Statistics Canada’s 1997 study found Canadian small business failures boiled down to external factors that were compounded by lack of management, planning or marketing.
Signs of Improvement?
Business lore has long believed that 50 percent of businesses fail in the first year and 95 percent fail within five years.
In stark contrast, the Small Business Administration found two-thirds of new employer establishments in the US survive at least two years, and 44 percent survive at least four years.
Australian Statistics released by the Productivity Commission also indicate most Australian businesses survive for a considerable time with around two thirds of businesses are still operating after five years and almost one half are still operating after ten years.
Extracting the Juice
“Enough with the statistics” I hear you yell.
It really doesn’t matter that much what the exact numbers are. The juice in this data is:
- a number of businesses fail because they are deficient in one or more core areas;
- many others blunder along and eventually work through or overcome their shortcomings; and
- the first few years of any venture’s life are critical.
We should each consider our personal deficiencies and our venture’s shortcomings. Periodically conducting a realistic and frank assessment can be a crucial management tool. Put it in your calendar, otherwise it is likely to meet an ugly end in a dark alley at the hands of procrastination.
Time for another confession: Despite my best intentions and efforts, I tend to be as blind as a welder’s dog to my own shortcomings.
I’ve made subtle progress over the years and asking colleagues and customers to point out weaknesses has helped. I’ve still got a long way to go…
Each time I’ve overcome my recalcitrance, I’ve been pleasantly surprised to find many clients are happy to let me know how I could improve things or even to just lend a bit of advice. They even seem to think more of me because I, at least, appeared willing to address things and change.
Disclaimer
The lawyer within me demands that I end this post with a disclaimer. I’m neither a statistician nor an academic expert in this field. These musings hopefully provide some insight and I welcome any corrections or enlightenment – just try to be kind when correcting my ignorance.
| Photo by Hamed Saber |
Business Survival Rates
February 8, 2008
Could it be possible that modern start-up businesses are less likely to fail than their predecessors? Are the Internet and other digital aids contributing to this trend? Are business conditions improving or is capital more organised and available? Do survival rates dramatically vary between countries or region and, if so, why?
Great questions… just wish I had a few more answers. I’ve gathered some interesting statistics though and the data indicates a positive trend. Importantly, it also points out why some ventures end up as wreckage along the edge of the Highway of Commerce.
I hope the following data provides food for thought and, as always, I’m keen to hear from you if you can enlighten us with answers or insights. First some data on what may be causing these calamities and then some stats on what may be trend changes.
| Continue reading » | Photo by Nicholas_T |
Embracing Failure
January 29, 2008
Regardless of what I think of the travesties that formed the tail-end of the Rocky series, I’m in complete awe of the persistence Stallone showed to get into the movies. I doubt I have that much ticker.
Stallone endured years of rejection and near-destitution before he crashed through to Oscar success. This video gives some great insight into how he held to his ideas despite so many obstacles.
Even Bill Gates tasted gravel when his first business venture, Traf-O-Data, slid out and crashed. Yet, he had the persistence to remount and have a second go with his slightly more successful Microsoft venture.
Such stories mean different things to each of us and rather than rave on about the obvious, I’ll end with the timeless wisdom of Kipling’s “If” poem:
If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breathe a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the will which says to them: ‘Hold on!’
Surviving the Desert of Doubt
January 10, 2008
I won’t bore you with how many times in my life I’ve failed to realise my potential (or was it that I actually realised its limits?). You’ve probably got the idea I’m hammering.
It hasn’t all been doom and gloom; I’ve achieved in other areas and have enough degrees and professional qualifications to immodestly festoon an otherwise drab office wall.
Why did I achieve in some areas and fail in others? What were the crucial ingredients in either outcome? I could gaze at my navel for hours…
The outcome of my self analysis is that academic success is so much easier. Once you enrol, the spoon feeding begins. Exams and assignment deadlines then force you to deliver.
In stark contrast, trudging alone through the desert of doubt with a head full of ideas is no fun. It takes perseverance and determination. Importantly, it begins with a first step… followed by another.
The old Elephant Eating analogy applies. The only way to eat an elephant is one bite at a time.
My problem is that I often try to swallow large chinks of any project right at the beginning and the resultant digestion eventually kills off my enthusiasm.
| Photo by Hamed Saber |