In general I don’t recommend discounting your product or service as a means of improving cash flow. Discounting for many businesses can be a slippery slope and simply increasing revenue without profitable growth is not a good strategy.
There are times and types of businesses that do lend themselves to discounting strategies.
If your product or service has a perishable life then it may be a candidate for using discounting strategies. I am not talking about selling bananas but they certainly are a kind of product that suits itself to this strategy. I am really talking about products like airline tickets, hotel rooms, rental cars, and other products where the business has a pretty high fixed cost and low variable costs to provide.
Certainly hotel rooms qualify because the costs of a hotel mortgage are quite high (fixed costs) and the variable costs of the running the hotel is low in comparison. When a hotel’s revenues are in a high demand area it makes a great deal of sense to discount in the week or so prior to the expiration date of the potential booking. The time when it would not be a good strategy is during a period when occupancy is expected to be near capacity, like during a weekend festival when many out of town visitors will be renting hotel rooms.
Companies like Hotels.com make sense because they aggregate deals for cities you may travel and need to stay at a hotel. The catch is you have to pay in advance, so if your trip is cancelled for some reason, the amount of money you spend (less Hotels.com commission) is nearly pure profit for the hotel and helps a hotel owner get to and pass its break-even point.
Two weeks ago I discovered a website that shows one deeply discounted product or service for the day for a given community. www.livingsocial.com is a simple website that lists one “deal” per day in 16
The first day I started subscribing to Living Social the deal of the day was for a water ski boat rental for a company I have used a number of times. They rent a fast 20’ ski boat for two hours for $150. Their special was 50% off of a two hour rental. They offered discounts of $37.50 per additional hour. Each of their boats are ready to pull away from the docks and come complete with water skis, vests, and all the equipment you need for a few hours of fun on the lake. During the 24 hours the deal was available on Living Social, the company sold over 1,200 packages. There were very few limitations on how the rentals can be used and there were only a couple of black-out dates. This business probably generates 85% of its money between the time the local university lets out (in about a week) and when school starts in late August. When the water is cold business is too.
By my calculations they brought in real cash of about $90,000 in the deal. There will be many people who will elect to take a day off and use the pre-paid rental on a weekday when the company would not have other rentals booked and the final cost to provide an hour of ski boat rental has a high fixed cost (marina rental, boat insurance, core staff costs, etc.) and a low variable cost (fuel, wear and tear on their equipment, and extra staff). It was a perfect strategy for this company who last two years survived one of the worst summer droughts on record. This year the lake is full and the water inviting. This discounting strategy will help the company start out a good season.
The strategy was a good one for many reasons. First, there will be some people who for whatever reason that will never use their pre-paid rentals. Second, this seasonal business is beginning the season with a fair amount of extra cash on hand after having had two disastrous years because of the economy and low lake levels caused by drought.
Lastly, the strategy put the boat rental company’s name out there for others (like me) who didn’t realize that the deal was only good for 24 hours and missed buying a pre-paid rental on the day it was announced. It may make me think about spending a few hours on the lake in one of their nice boats on a weekday instead of going out of town for a weekend and spending more money. Of course I will pay full price which is an extra perk for the company.
There are several other reasons when it makes sense for a business to discount. I will discuss these in a later post.