Magazine article Management Today

Don't You Believe It ... in a Downturn, Discounting Works

Magazine article Management Today

Don't You Believe It ... in a Downturn, Discounting Works

Article excerpt

You've probably long since recovered from Christmas by now, but many retailers haven't. Even those who avoided the fate of Woolworths, Zavvi, Land of Leather et al and remained in business had little reason for festive cheer. The frenzy of heavy discounting - 50% off and more in some cases - has left a lingering and painful legacy on the high street Here's why discounting is such a bad idea...

It really hurts the bottom line. McKinsey & Co calculates that a 1% reduction in price typically produces an 11% reduction in profit. So the effect of a 10% reduction is... well, you do the maths. It also calculated that a 1% price-cut needs a 3.5% increase in volume to maintain profits. Few markets respond this well to discounts.

Being cheapest doesn't work for most firms. Ryanair makes money from charging the lowest fares because everything it does is based on being lowest-cost. BA doesn't try to match Ryanair on price because it knows it can't afford to. …

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