# Discounting – How can I identify the impact on profit margins?

The rebate is not new. However, the urgency of urgency and the feeling of fear means that many small and medium-sized enterprises are affected by the price-relief systems.

The most important issue is that every business must be aware of the potential impact on profits. As there are many examples of businesses that have lost losses, they indicate some uncertainty over uncertainties

. There are two different areas:

- Costs for meeting the extra demand

Sales revenue limits are directly affected by discounts as direct credit is achieved. It sells for $ 10, a 10% discount and a new selling price of $ 9. If the sales cost is $ 7, you will have to pay $ 2 instead of $ 3.

To reduce profits, increase sales volume by 50%. Which looks crazy. Why do you need to add 50% more products?

The numbers are calculated as follows:

Standard sales of 100 units for $ 100 x $ = $ 1000

Sales cost ($ 100 x $ 7) $ 700

The margin dropped from $ 300 to $ 200

10% discount (100 x $ 1) $ 100

The main price is $ 9 and the expectation to create more discounts through discounting, the business must sell 50% more units to stay the same and in this example it is assumed that your business requires coverage of $ 300 to cover costs and / or net profit

Quick calculation shows you have to sell $ 150 x $ 2 instead of $ 100 x 3 to produce $ 300.

Some businesses do not understand this, Even 50 units are not an easy task, especially if you are not a volume producer or a large retailer. And even those hits are loss-making executives who produce other products to generate profits to cover the loss.

It is a risky strategy if a business does not get its strategy.

** Cost of meeting extra demand. **

The problem is that the extra production cost is greater than the sales value. Or in other words – you have given too much discount, so the selling price is lower than the cost.

For example: cup cakes. Popular but not cheap. In our second example we use these numbers.

Standard Sales Unit $ 5

Production Cost $ 2

Sales Margin $ 3

And we assume that there is a big sales boost of 50% off. (And this is happening.)

Just take a break to get to this point. The cost of production is based on: material costs; labor costs; produced quantity; and time. And in general, the business has other costs, such as rent, energy, depreciation, which we consider to be fixed. They often assume that they remain the same as they are recorded. It's important to note that they are recorded only for a certain level of production and for a certain time. If the amount exceeds this level, these fixed costs will also increase.

If this idea is pushed, then 50% go over the roof. If so, the total cost of production is growing. This means that every unit manufactured loses its money. And the more sales, the greater the loss.

The structure now looks like this:

The sale price after the discount ($ 5 x 50%) $ 2.50

Production cost 30% increase ($ 2 x 1.3)

Unit sold loss $ 0.10

Selling 100 units at this discount and the company loses $ 10. He sells 1000 pieces and loses $ 100. Basically, this business loses all its sales. The more stores sell, the greater the loss. And in this case, selling a commodity may erase business results.

Source by sbobet