Financial Guide for SMEs - SME Corporation Malaysia

Financial Guide for SMEsDiscounting SalesDiscounting your goods or services toentice customers to purchase may erodeyour profi ts. Of course, some discounting canbe benefi cial; however, before you decide tooffer discounts, it is important to understandthe impact that discounting will have on yourprofi ts. Alternatives such as add-on productsor services may deliver more value of grossprofit to the business and should be consideredbefore deciding to offer discounts.HINTYou may want to consideroffering your customersadd-on services as analternative to offeringdiscountsIn the previous section, we discussed sales “net” of discounts. When you offerdiscounts you are effectively offering your goods or services at a reduced sellingprice. Where discounts are offered, you will need to sell more goods in order toachieve your gross margin.Let us return to Adam’s Computer Bags. He is considering offering a 5% discountto encourage more sales. Adam needs to keep his gross margin at 40% to ensurethat he reaches his profit goal. As the table below shows, if he decides to discounthis bags by 5%, he will need to increase his sales volume by 14.3%.If you cut yourprices by...5%The Effect of DiscountingAnd your present Gross Margin (%) is .......10%100%15%50%20%33.3%25%25%30%20%35%16.7%40%14.3%6%150%66.7%42.9%31.6%25%20.7%17.6%8%400% 114.3%66.7%47.1%36.4%29.6%25%10%200%100%66.7%50%40%33.3%12%400%150%92.3%66.7%52.2%42.9%15%300% 150% 100% 75% 60%43Chapter 2-5 p22-65 Eng.indd 438/15/11 5:01:55 PM