The Truth About Sales and Discounts

On the most part of the holiday season, we always get to hear news, receive fliers and see advertisements about sales and discounts offered in streets and malls. But why do businesses do these things?

The question seems to be so simple to answer but the answer is always at every one's tip of the tongue. To start with, sales and discounts when offered is a marketing strategy for different reasons. It could be that a new packaging or size or amount of a product is about to be unveiled but current inventories should be sold out first before they could release the new ones. That's why we sometimes don't seem to find the products we always buy and store people tell us "Out of stock". Aside from the changes in packing and amount, new companies tend to grab the attention of those existing companies' market share, their existing consumers. Aside from the captivating and million bucks worth of advertisements, they tend to sell their products for lower prices than the usual brand.

Other companies just tend to sell their products for less just to give way to their new ones. That simple. But can they still earn despite selling them for less? This seems to be a kindergarten question but not everyone knows the way businesses price their products. The very first thing that a seller should consider is defending the cost of the product it was actually bought for. It's better to earn the very same invested than incur losses. In big companies, pricing is not a simple thing they do when they sell their products and services. They adopt "pricing methods" to determine saleability and desired revenue. Sales and discounts are already considered as "Plan B" or in "just in case" situations. After the cost has been determined, an initial markup is added ready for sale to middlemen. Factory price already has markup but this has to be considered as a cost on the part of the middlemen. Middlemen determine income out of the cost of the items bought from the manufacturer, so they add markups so they can reach their desired revenue. When supermarkets or retailers buy products from middlemen, they add another markup so they can have income. The bottom line is that a series of makups were added from the manufacturer to end-users. It is the retailer who determines price discounts to ultimate consumers so we assume that markups added to middlemen price are higher as compared with the factory and the middlemen prices. Say when you go to a supermarket and they offer a 10% off on a product.

Price of the product is $10 (supermarket price)

Amount of discount is $1 ($10 x 10% off)

So you only pay $9. Are they earning? Of course! It's like this:

The $10 price already includes the following:

$3 - cost of the product from the middleman
3 - desired income as projected by the supermarket's management
3 - operating costs (from the time the product was purchased until it was sold)
1 - allowances (this is where they charge the sales and discounts)
___
$10

Allowances are basically used in case of product defects and the like. Take note that with or without the discount, the retailer still earns the same desired income of $3. See?