Lowering prices — also known as implementing a sales discount — might seem like a surefire way to turn heads and generate interest in your business, and in many cases, it can do just that. But there are a lot of layers and potentially negative implications to consider when offering one.
Discounts can often go either way, depending on how well-structured, timely, and drastic they are. So if you're thinking about implementing one, it's important you have a firm grasp on the concept and understand the perks and pitfalls of the practice.
Here, we'll get a firmer picture of what a sales discount is, some guidelines for when they're appropriate to implement, and what the term means in the context of accounting.
What is a sales discount?
The term 'sales discount' is a catch-all term for any reduction in price a seller offers for its product or service. That said, the term takes on specific meanings in certain contexts. For instance, in accounting, the term generally refers to a price reduction a business offers in exchange for a buyer's early payment.
Sales discounts have a presence in virtually every industry — perhaps the most prominent forums being retail and ecommerce. Promotional pricing campaigns like flash, seasonal, and clearance sales are some of the most prevalent, well-advertised, and immediately visible examples of sales discounts.
Still, the concept is ubiquitous and extends well beyond those spaces. It spans across every space and can be employed by businesses of almost any scale or nature — from B2B SaaS giants to individual service contractors.
A sales discount can be an effective means of generating demand and revenue, but implementing one comes with its fair share of risks and potentially disastrous pitfalls. Here are some of the most important reasons to consider when deciding whether you should leverage this kind of strategy.
Why Offer a Sales Discount
It can quickly drive sales.
It's a good way to move excess or outdated inventory.
It can help you create demand for a new product or service.
You can attract new customers.
It can help you boost your reputation with specific demographics.
1. It can quickly drive short-term sales.
Offering a sales discount is one of the most straightforward ways to drum up instant consumer interest in your business. Discount pricing strategies like flash or seasonal sales are designed to pique prospects' interest and generate new business within short windows.
If your business is looking for a quick-hitting sales strategy to immediately boost sales, a sales discount is an option worth exploring. Still, it should be noted that this benefit only applies to short term sales. If you offer some kind of long-standing discount on your products, your customers will come to expect those lower prices all the time.
2. It's a good way to move excess or outdated inventory.
It's fairly self-explanatory, but the products you offer only become "excessive or outdated" when you can no longer reliably move them at full price. If you have unwanted inventory taking up space that needs to be allocated to newer or more desirable merchandise, offering a discount on those products can be an attractive, viable means of getting rid of them with some return.
3. It can help you create demand for a new product or service.
Sales discounts are promotional by nature. They're designed to pique interest, and if you're looking to generate demand for a new product or service, interest is exactly what you need.
A limited-time, promotional discount for a brand new offering can turn some heads and make consumers take a closer look at the product or service you're trying to promote.
4. You can attract new customers.
As I just mentioned, discounts can make consumers take a closer look at your business — and that includes prospects that might not have been interested beforehand.
Budget-conscious consumers often take notice of well-structured, adeptly promoted sales discounts. If you can nail those criteria, you might attract new, potentially brand-loyal customers you would have missed out on otherwise.
5. It can help you boost your reputation with specific demographics.
In some cases, sales discounts can be targeted to attract specific demographics. It's not uncommon for businesses to run promotions offering discounts to seniors or students. If you're interested in zeroing in on and attracting a specific customer base, a sales discount is an avenue worth considering.
Why Not Offer a Sales Discount
It projects a lack of confidence.
It sets a bad precedent.
It establishes a lower perceived value for your product or service.
You can come off as untrustworthy.
It cuts into your profits and can exhaust your sales team.
1. It projects a lack of confidence.
In some cases, a sales discount can come off as you telling your customers, "We don't believe in our product or service enough to sell it at full price." Consumers want quality. If you implement a sales discount — particularly a drastic one — they'll question the soundness of your offering and look to businesses in your space that are confident in their products and services.
2. It sets a bad precedent.
Offering a discount can lead your customers to expect those lower prices, going forward. Consumers get used to price reductions quickly and will be put off at the prospect of paying $50 for a product or service they already got for $40. When your prices go back to normal, many customers won't stick around to pay them and others might hold out until you offer a similar discount again.
3. It establishes a lower perceived value for your product or service.
Sales is the art of conveying value. You're trying to convince a prospect that your product or service is legitimate, helpful, and will improve their life. A sales discount often undermines your ability to do that.
In a similar vein to the first point, a discount might come off you demonstrating that you don't have faith in your own product or service. It can be difficult to convey your offering's value if you're coming in with a discount that implies you, yourself, don't value it.
4. You can come off as untrustworthy.
This point is especially relevant when you’re in the middle of a sale. Say you’ve already laid out the proposal, and you've told your prospect that your standard pricing package is the very best that you can do for them. If they don't seem receptive to it, and it seems like the sale is going south, it could be tempting to offer a discount.
While your prospect might be on board with the lower price, they might be thinking, "They just said their standard pricing was the best they could do, but they offered me a discount when I hesitated. What else haven’t they been honest about?"
Resorting to a discount out of desperation can seem sleazy, and that's something to remain mindful of — particularly when you're nervous about a deal falling through.
5. It cuts into your profits and can exhaust your sales team.
This point might be the most obvious drawback to offering sales discounts. If you don't sell your product or service at full price, you're bound to cut into your profit margins. A 50% discount means you have to sell twice as much to reach your revenue goals.
Piling that kind of workload on your salespeople can take a lot out of them. And spreading them that thin can make them lose out on valuable face-time with prospects.
It might go without saying that discounts aren't always financially sound. It's important to be wary of that point when structuring and implementing one, and always be mindful of the strain that it might place on your sales team.
Sales Discounts in Accounting
In accounting, a sales discount typically refers to a reduction in payment a seller offers a customer in exchange for early payment. Businesses usually leverage the concept when they're short on and in immediate need of cash.
For instance, a seller might offer a 2% discount for a customer who pays for a product within 30 days of the invoice date instead of some other time during the 90 day window the seller specified.
A sales discount is considered contra revenue — a deduction from gross revenue that ultimately contributes to net revenue. On an income statement, it's typically recorded as a deduction from sales.
Sales Discount in Accounting Example
Let's say there's a business that recently sold merchandise to a corporation for a total sales price of $100,000. The company is given 90 days from the invoice date to pay, but the customer can receive a 2% discount if they pay within 30 days. The initial journal entry would look like this:
If the customer were to pay beyond the 30-day discount period, the journal entry would look like this:
But if the customer paid within that 30 day window, the journal entry would be:
Cash ($100,000 - $2,000)
SALES DISCOUNT ($100,000 x 2%)
Offering a sales discount is a move that could undermine your sales efforts and value proposition just as easily as it could pay off in spades. It's a tough call that requires considerable thought, industry knowledge, and situational awareness.
If you're interested in implementing a discount, it's important to get a feel for how much risk you're willing to assume. And you need to carefully determine whether one can appeal to your prospects and customers without shaking their faith in and positive perception of your business.
Originally published Aug 9, 2020 10:15:00 AM, updated May 28 2021