Can Discounting be Profitable?

Walk down any High Street in any country over the last few months and I will guarantee you will see discounting taking place. Some retailers are discounting with 50%,70% and 90% discount signs on display to try and survive while others are planning a profitable perceived discount campaign. You may not consider a discount strategy as a means of making more money, but I have just come across an excellent example from one of my clients. For confidentiality I will change the product and situation. The client was generating around $1,000 dollars from the allocated space per square metre and making about 45% gross profit from the space last year from a product that normally would retail for around 5 dollars. A few weeks ago the supplier contacted the retailer and informed him that he had a major problem, the product the supplier was selling was not moving and he needed the space for new products that were coming on stream. He asked my client if he was interested in the product at a dollar a product if my client purchased in bulk. At a dollar a product my client felt he could not go wrong. My client is purchasing 20 pallets a week. Each pallet is displayed in the retail space and there is no material handling costs for the retailer. Each pallet contains 180 units and the retailer is selling these for 2 dollars a unit, compared to the old price of 5 dollars. Customers traditionally buy the product in one’s and two’s, the average customer is now buying 15 units at one time under the discount banner. When you do the maths, my client is selling 540 units a week at $2 a unit. This means he is now making the equivalent of $2,500 a square metre a year from the allocated space and making a gross profit of 50%. This form of discounting has created a win:win for the consumer and the retailer, plus hopefully the supplier. Not all discounting is going to provide such positive results, in fact most discounting creates the reverse, but it does highlight that planned purchasing to create a genuine offer to the customer and promoting it as a discounted line compared with what they would normally pay can have excellent results. Some retailers in the market place are discounting due to lack of sales, while other retailers are using discounting to grow sales and the bottom line.