The vexing issue of discounting

Any accountant in public practice can tell you about small business owners who make decisions on everyday business matters influenced more by what everyone else is doing rather than by the impact the decision will have on their businesses in their peculiar circumstances. For instance, a close and equally troublesome relative of pricing is discounting. It’s a strategy commonly used to boost sales for any number of reasons.

Discounting can be quite useful in dealing with inventory situations such as overstocking or redundancy. Quite often in these situations, the investment was lost when the product was bought, so any cash one can recover is a bonus. It’s certainly not an ideal solution, but recovering some cash is better than having the product occupy space while it ages—unless you’re a wine merchant.

Businesses run into trouble with discounting though when using it as a volume-boosting strategy. Typically, small business owners don’t properly analyze their discounting schemes and, as a result, these schemes can be more harmful than helpful. If the necessary financial acumen does not exist in-house, then the strategy should be discussed with an accountant or someone with similar insight into the effects of discount tampering. I saw a classic example of the potential consequences of thoughtless discounting in my own business, thanks to Andrew.