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While reading P. Barrow’s The Best-Laid Business Plans, I came across an interesting argument he had against giving discounts as a small business. The reason for writing this post was to inspect the simple but condensed table of data he provided (”Pricing Ready Reckoner”) which in the space of less than a third of a page, makes a very clear case against discounting.

Here’s the argument. In order to maintain the same level of profit, you would have to sell much more depending on your original Gross Margin and the amount of Discount. The amount of extra sales needed in each case is summarized in the following table as percentages.

The math is simple if you do not claim a portion of the margin, you have to make up for the difference by increasing sales. But the engineer in me wants to make the calculations more formal:

G=gross margin (%)
R=retail price for unit
D=discount (%)
S=number of items sold, S’=number of items sold (in discounted case)

Without discount we have:
Gross margin=R×G
Cost of Goods Sold per unit=R×(1-G)

With the discount, on the other hand:
Sales revenue per unit=R×(1-D)
Cost of Goods Sold per unit=R×(1-G), remains the same
New gross margin=R×(G-D)

To make the same level of profit
S’×R×(G-D)=S×R×G

Which means we have to sell (S’/S-1) percent more to compensate for the discount:
100×[G/(G-D)-1]

The rest is easy: put the Formula in a spreadsheet and you get that nice table above. There is another table in the book which shows the flip side of the situation: price increase. But I spare you.

As a final note, I believe that you could still make a good case for giving discount on your products/services for a variety of reasons such as building relationship in hopes of recurring customers, gaining market share, etc. However, Paul’s argument is interesting and makes the assumptions that your customers buy from you because of the flexibility, quality, and the service provided. Further, I would like to add to this list the fairness and competitiveness of original pricing.

Last week, I spent a bit of time on sales coupons for Giftify. Since I have no formal marketing education, I had to rely on common-sense and intuition. Please, feel free to give me feedback on this. I’m really interested to know what other people think of it.

The objective is to be able to sell at a discounted price to select individuals, groups of individuals, or everyone who carries a valid coupon code issued by the vendor. Sounds simple enough.

I thought of a couple of aspects of coupons:

Discount Logic

• Percentage coupon; e.g. 10% off the gift price
• Absolute amount coupon; e.g. $15 off the gift price
• Combinable with other promotions

Authorized User

This is who the coupon is meant for

• a specific user; e.g. A frequent customer, reviewer
• a group of people; this is similar to the individual user, but a little different in the database model
• general public; in this case you want to let anyone with a promosional coupon code to be able to benefit from the discount. e.g. GoDaddy promo codes.

Discounted Merchandise

This is more an implementation issue again.

• Authorize use of coupon on select gifts in the catalog
• Coupon is valid on every item in the catalog

Profit Safety Net

Is the objective of the coupon (promotion, appreciation, etc) worth losing money on certain orders from users with the coupons. For example, a person has a 15% discount coupon, but she wants to use it on a gift with a margin of 10%.

• Coupon allowed to override minimum gift price
• Coupon has a limit

As for implementation, I will give you a brief overview of my design. If there’s interest in seeing more details, please let me know and I will try to make a post. In summary, I used a Single Table Inheritance approach to model coupons in our database. That is, all various types of coupons (Percent/ Absolute/ Limitless/ Limited) are stored in a single table. I store coupon details, as well as the type in the table. In the controller code, when retrieving a coupon from the database, I look at the type first and use the correct code based on that.

That’s all. Please, let me know what you think of this post. Was it useful to you? Do you know of a better resource online which captures the information in this post and more?

btw, here’s a coupon code for Giftify to show my appreciation for reading this blog SOJOODIBLOG