Don't you believe it ... in a downturn, discounting works

It may be tempting, but discounting can leave more than your prices in tatters...

Last Updated: 31 Aug 2010

You've probably long since recovered from Christmas by now, but many retailers haven't. Even those who avoided the fate of Woolworths, Zavvi, Land of Leather et al and remained in business had little reason for festive cheer. The frenzy of heavy discounting - 50% off and more in some cases - has left a lingering and painful legacy on the high street. Here's why discounting is such a bad idea...

It really hurts the bottom line. McKinsey & Co calculates that a 1% reduction in price typically produces an 11% reduction in profit. So the effect of a 10% reduction is... well, you do the maths. It also calculated that a 1% price-cut needs a 3.5% increase in volume to maintain profits. Few markets respond this well to discounts.

Being cheapest doesn't work for most firms. Ryanair makes money from charging the lowest fares because everything it does is based on being lowest-cost. BA doesn't try to match Ryanair on price because it knows it can't afford to. Can you?

Discounting leaves you short of money. Money that you should be spending on things such as customer service. We've all queued up for bargains when only half the tills are open, and where even the staff who are working seem to be operating in slow motion. Maybe that's acceptable in a pound shop, but it's very bad news for more upmarket brands.

So the take-home message for all kinds of business is: you can't distinguish yourself solely on the basis of low prices. You need something that can't be so easily copied: service, product range, the customer experience - or something else. And you'd better find it quickly if you want to be around next Christmas.

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