Discount Management

Any evening that you go out for dinner gives you a basic lesson in economics.

As you would recall, the 3rd slice of your favourite pizza at does not taste as good as the 1st slice. The economist have a term for it. It is called declining marginal utility. And people want to pay less for something whose utility is low. Continue reading Discount Management

React wisely to competitor’s price cuts

Many industries are destroying their capital by indulging in price wars. Online retail, telecom and airline are some of the industries that are on top of my mind. It usually starts with one company and then others make counter moves, thus causing a downward spiral. Continue reading React wisely to competitor’s price cuts

Don’t worry. We will make up in volumes. Really?

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. Continue reading Don’t worry. We will make up in volumes. Really?

Credibility issues with discounts

This story is partly funny and partly sad.

A few years back, I was advising an industrial company on their next generation technology initiative. As a part of the plan, the client needed to buy some servers.  The project sponsor promptly invited a large IT company, whose name I shall not disclose. The meeting was productive but the client representative decided to hold back on purchase. On my probing, he disclosed that he bought all the IT equipment at the end of the quarter. That is the time when he got maximum discounts as sales people were in a hurry to meet their quotas.

Continue reading Credibility issues with discounts