Then discounts make sense for companies – series on discounts part 3

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Then discounts make sense for companies – series on discounts part 3

24.10.2019

While the first two episodes on discounts focused on the reasons for asking for discounts and avoiding them, this part is about discounts that help to increase profits. Dr. Markus Heller, managing partner of Dr. Fried & Partner, a consultancy specializing in tourism, explains how discounts actually make sense in certain situations, especially when they contribute to a sustainable increase in turnover and profits. Care must be taken to ensure that no unnecessary money is burned, but that discounts are well calculated and used sensibly.

Sensible discounting requires economic understanding

In general, it is important to calculate discounts correctly in order to keep the economic impact under control. A prerequisite for this is a very good knowledge of the margins and contribution margins of the individual products as well as the general earnings prospects. For example, services with low margins should only be provided to a very limited extent and then either with low price reductions or offered in very limited quantities.

But even products with high margins are not always predestined for price reductions. After all, these are often the products relevant to the profitability of the company as a whole. So if you start with these, there is a risk that I will cut off my most important pillar.

Price reductions can be useful from time to time to boost sales and earnings in general. This is particularly the case when

the achievement of certain commission thresholds is dependent on a certain booking or purchase completion of a (small) number of transactions (e.g. shortly before the end of the year)

a period of weak sales or bookings with under-utilized employees must be bridged

the company should be brought to the attention of the public at the start of business or major changes

or services that have an expiry date, such as exclusive charters or fixed quotas, must be sold.

On the other hand, the use of discounts in sales talks can be supportive when it comes to closing a lucrative deal. However, the decisive factor here is that the discount itself does not make the business uneconomical and that no negative effects in the sense of a continuous reduction of the price level are to be expected for follow-up business.

If possible, discounts should be designed in such a way that the benefits of the price campaign are as high as possible and the costs are low at the same time.

Concrete recommendations for your price campaign

Discounts should only apply to individual products 10% on all bookings of a week brings less attention than 20% on a (time and quantity) limited offer.

Quantity discounts are particularly useful if several bookings are bundled for one offer and the effort involved is not disproportionately high. This way the discount can be compensated by the quantity of bookings.

In areas of tourism that have high fixed costs, a temporary price reduction can make sense in order to at least cover these costs proportionately. We are of course familiar with this phenomenon in the hotel or airline business with large price differences between high and low season.

If you decide on a somewhat broader discount campaign, you have to make sure that it is very limited – both in terms of time and quantity. This type of shortage is the best way to achieve the desired effect of an increase in demand.

Variety and concrete occasions support the special character of a controlled discount. This prevents the company from becoming known for permanent price reductions that threaten profitability

Advanced discounters combine various discounts. You can act in this way, but on the one hand this is highly risky, as profitability often falls by the wayside. On the other hand, the price-psychological effect fizzles out quite quickly.

Granting a discount on the next purchase is a very promising option. On the one hand, the chance of a repeat purchase increases, on the other hand, the discount offered can be spread over two bookings or purchases and thus only half of the contribution margin is affected.

The corresponding publication of the series can be found in the trade journal Reisevor9.

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