I was thinking what is better for profitability? Offering a discount i.e. price reduction or offering free goods [of discount value] instead. Your help is much appreciated. Kind regards Ankur
What is better for profitability? Offering a discount i.e. price reduction or offering free goods [of discount value] instead. Your help is much appreciated.
Answers
It really from my opinion dependent on your product, market space, normal clientele, the targeted clientele, etc.
One solution does not fit all; and if you examine what many retailers do, it is a combination of programs.
While different programs may appear to have similar bottom line impacts your best metric is how much permanent lift is provided.
need more context on type of products, market etc. with free goods you need to consider whether the free products will actually be used. If not, there is no value for the client. Further, every time you offer free goods, you also reduce your addressable market. An issue if you are selling to a limited population.
From pure/straight profit point of view, calculations for the impact on profit of a product sale with a sales price of USD100 and cost of USD50, it would appear that free goods is favored vs. discount.
Let's make a case using these data in the sale of 10 units where the total sales would be USD1000 while total cost of sales would be USD500. Without sales discount or free goods given, the profit would be USD500. However, with a sales discount of 10%, net sales would be USD900 (USD1000 less 10%=USD900). Deducting USD500, the cost of 10 units, profit would be just USD400 (USD900-500=USD400). This profit is smaller than if a 10% (1 unit) free good is given. Sales of USD1000 minus cost of sales (USD500) and cost of one unit (10%) free good costing USD50, results in net profit of USD450 (USD1000-500-50=USD450), which is USD50 higher than where 10% sales discount is given.
Stated in another way, sales discount is normally calculated on sales price while cost of free goods is calculated on cost of goods sold. Cost is normally a smaller base than sales, hence, the reduction in profit is bigger when a sales discount instead of free good is given.
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While your point is "on the money", and you clearly delineated the limited scope of your argument; however -
One can not eliminate the customer from the equation and the motivation to buy [more] goods based on discount/free item.
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