Question

Entrepreneurship and Effective Small Business Management, Student Value Edition (11th Edition)

Explain the dangers of using discounting as a pricing strategy for increasing sales.

Pages: https://www.chegg.com/homework-help/Entrepreneurship-and-Effective-Small-Business-Management-Student-Value-Edition-11th-edition-chapter-11-problem-1ITE-solution-9780133543070

Answer 1

There are following dangers:

1. Discounting in price increases the break even volume required to achieve the no profit -no loss condition. But sales volume may not increase if competitors also decrease the price.

2. Reduction in price leads to the decrease in gross profit margin and subsequent net profit margin. It may be dangerous if sales don’t increase sufficiently.

3. Decrease in price using discount, may force the company to compromise the quality. It will cause the poor brand positioning and sales will decrease further.

4. Discounting does not guarantee an increase in sales, but it puts pressure upon the operation and working capital management. As a result, company can suffer the financial constraints.

Hence, discounting of the price, has its own dangers.