Price Discounts: Types and Use
Sometimes it may be necessary or beneficial to utilize price discounts. This video discusses five types of price discounting options and situations for their use.
- [Sarah] Sometimes it may be necessary or beneficial to utilize price discounts.
There are several types of discount options that can be used to your advantage when applied appropriately.
Carefully consider the type of discount you employ and the frequency of use.
Inappropriate, or too frequent use can make their sue ineffectual.
Also, what is your goal for applying the price discount?
Be sure to have a strong business case for discounting.
If you're applying a discount simply to sell more product you should step back and reconsider your original pricing structure.
This video will discuss five types of discounting options and situations for their use.
As when initially pricing your product or service, you'll need to know your cost of production prior to applying a discount.
Will you still break even?
Does this cover your cost of production after discounting?
If not, how long do you intend to keep the price discount in place?
You'll need to consider the implications to both short-term, and long-term profitability for the product and your business, as a whole.
The first type of discount we'll cover is the quantity discount.
Quantity discounts can be cost-effective when customers make large purchases.
Let's say you make specialty bakery products and that the box you use to ship muffins and cupcakes to your customers holds 12 items.
For those customers that place orders filling the box you could implement a discount of 5% on their order.
This rewards customers for providing you the ability to efficiently produce and deliver products.
A cumulative quantity discount is given to a customer after he or she has purchased a certain quantity or dollar amount of product.
Employing this type of discount keeps the customer returning to your business since they cannot receive this discount until they have purchased the specified value.
This is the type of discount that you often see grocery stores employ around the holidays.
For example, by purchasing at least $300 in groceries no matter how many trips it takes, you can earn a discount on the price for pound for a turkey, or ham.
Seasonal discounts are applied at times when sales are typically slower than other times.
For instance, if you observe the sales for a particular product are lower in February or March than during the rest of the year, you may want to consider applying the discount to the product during those two months in an effort to boost sales.
Take caution to ensure that you use this discount on products that your customers will be purchasing at sufficient quantities throughout the year and not simply wait for the time period when you discount.
A cash discount is a discount given to a customer if they pay their bill before a specified date or within a certain time period.
For instance, if you allow your customers to make purchases on credit, and thy pay their bill within 30 days of the purchase, you could discount their purchase by a small percentage to reward them for timely payment.
This type of discount can also be seen as an incentive for continued business.
Promotional discounts are given to stimulate sales of a product.
Promotional discounting is also referred to as promotional pricing and used as a pricing strategy.
If you have a new product, or if sales of a product are lagging, you may consider utilizing this type of discount.
You should be sure that you are truly employing the discount as a promotional tactic and that customers will still value and purchase the product at its true higher price.
Discounts can be useful for enticing customers to try your products, or to reward them for loyalty.
As with choosing a pricing method choose the type of discount you are going to use by considering your customer, the product or service, as well as your goals for the outcome of discounting.
Frequently Asked Questions