Last week, Marka and the FEI tribe discussed how strategic discounting can lead to greater profits. This week, the discounting discussion continues with more reasons why a business should possibly consider discounting. Remember, fire = print.
Numo stood in front of the FEI team, fielding questions on discounting from whomever had them.
“In what other scenarios should FEI consider discounting our products and services?” Org asked.
“Glad you asked,” Numo said, turning to the whiteboard and writing:Elastic vs. Inelastic Demand
“With products and services for which demand is elastic—i.e., very sensitive to price—consumers will respond to discounting by buying them in correspondingly larger amounts,” Numo explained. “Even though our profit percentage per unit sold will be lower, we’ll sell substantially more total units and end up with higher total profit, as long as production holds up its end.”
“Is demand always elastic?” Zoot asked.
“No,” Numo replied. “There are products with inelastic demand curves, which means their demand doesn’t change that much as prices rise or fall. Discounting is a bad idea for products that fall into the inelastic category.”
Numo returned to the whiteboard.Pricing After Achieving Monthly “Nut”
“Once we’ve sold enough in a month to cover all our fixed and variable costs, we can afford to take a few chances from a pricing strategy standpoint,” Numo said. “One school of thought is that this is a key time for FEI to discount and bring in new customers who otherwise wouldn’t have considered us.”
“But the other is that once we’ve met those expenditures, we should hold steady on price,” Org countered. “At this point, we’ve already hit our ‘breakeven’ for the month and should be accepting only the most profitable work.”
“Neither approach is wrong,” Numo said. “Whether or not to discount after achieving our monthly ‘nut’ depends on management philosophy.”Today’s FIRE! Point
Discounting can be a worthwhile strategy, if demand for your product is elastic or your company has already met its fixed monthly costs. In these cases, discounting may be able to help you grow your profits. FIRE! in Action: Welsh National Opera Lowers Prices and Boosts Profits
The Welsh National Opera_ found that decreasing ticket prices could encourage current opera-goers to attend more shows. In the four years since changing prices, it has increased the average number of tickets sold by 10 percent,
which was more than enough to overcome the impact of the reduced average price. In addition, average net income for each performance increased by 5 percent.
Next week: The FEI tribe discusses the strategy behind selecting a distribution method for their products.