This will be a short post.
Let me begin with a question. “If you decrease the price of a product by 20%, how much additional volumes do you need to recover the loss of profit?”. Go on. Give it a try.
If your answer is 20%, then you are not alone in underestimating the gravity of the issue. While the answer depends on the exact cost structure of a company, for a typical company, as the following table shows, you need to double your sales to keep the profit at the same level.
The side effects of discount on volumes: So, before you embark on this journey, do take a realistic assessment of your volume upside. Some of the questions that you need to ask are whether the market is big enough to give you this kind of volumes uplift. Secondly, how would the competitors react if you take away market share from them. And lastly, are you stealing the market share from yourself i.e. are your customers stocking up for future, in which case you would expect to see a dip in volumes after the discount period.
All these issues need some detailed work before you roll out the discounts.
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