Accounting for promotional and discounted prices

The thought "if I discount, more customers will come" is right, but only partly. Customers may indeed increase, but the profit on every sale shrinks noticeably. The result is that goods fly out during the promotion and the till is full, yet at the end of the month profit is lower than in a month without one. That does not mean promotions are bad; they simply need to be calculated before the sale. A few simple figures are enough.

How a discount eats profit

A discount removes part of the price while the cost stays the same, so the share of profit becomes much smaller. For example, an item costs 36,000 so'm and sells for 48,000. Profit per unit is 12,000, that is 25 percent of the price. At 40 units a week, profit is 480,000 so'm.

• 10% off: price 43,200, profit 7,200. To keep the old profit you must sell 67 units a week, 67% more.
• 20% off: price 38,400, profit 2,400. Now you need 200 units, which means sales must grow five-fold.
• 25% off: price 36,000, which is the cost itself. However much you sell, profit is zero.

The break-even formula

A simple formula shows how much sales volume must rise for a promotion to hold profit: required growth = discount ÷ (margin − discount), with both values taken as a percentage of the pre-promotion price. In our example, with a 25% margin and a 10% discount: 10 ÷ (25 − 10) = 0.67, or 67%. With a 20% discount: 20 ÷ 5 = 4, or 400%. The smaller the margin, the riskier the discount.

The "2+1" and "half price on the second" tricks

Offers like these usually look generous to the customer, but the discount in them is bigger than it seems. "Three for the price of two" is in fact 33% off. For our item, three units go for 96,000 so'm while the cost is 108,000. Every bundle makes a 12,000 so'm loss. With a 25% margin and a 33% discount you have dropped below cost. And "half price on the second" gives 25% off across two units, which for our item means zero profit. Before announcing any promotion, always convert it into an "overall discount percentage".

How to record a promotion

Add three columns to your product table: promotion price, start date and end date. During the promotion note the units sold from the till. Compare the result over three periods: the week before, the promotion week and the week after. Often sales after a promotion fall below normal, because customers stocked up cheaply in advance. If total profit over the three weeks is lower than in ordinary weeks, the promotion did not pay.

For example, the week before the promotion you sell 40 units for a profit of 480,000 so'm. In the 10%-off week 52 units go, profit 52 × 7,200 = 374,400. The following week sales drop to 30 units, profit 30 × 12,000 = 360,000. Over three weeks that is 1,214,400 so'm, whereas without the promotion it would have been 3 × 480,000 = 1,440,000. On the surface the promotion "worked" and the till filled up, but in fact 225,600 so'm was lost.

When a promotion makes sense

A discount is not always a loss. It is justified in these cases:

• to turn slow stock or goods near their date into cash, where getting money back matters more than profit;
• to clear leftovers at the end of a season;
• to knowingly set minimal profit on one or two "attractor" items, if you are sure the customer will buy other goods too.

There is an alternative to discounting, too: a small gift with purchases above a certain amount. A gift costing you 5,000 so'm often comes cheaper than 10 percent off, and the customer values it. In each case you see the loss in advance and know its limit. The worst thing is to lose money without noticing.

Conclusion

A promotion should be a calculated decision rather than a silent price cut: cost, margin, required growth and the result after the sale. For the calculation to come out right, the costs and balances in your table must match reality. The AniqHisob team can run a stock count and help you plan promotions on reliable figures.