I've had to learn the hard way that discounts are a double-edged sword.

Business owners use discounts to do one of two things: clear out old product or incentivize purchasing more. Using discounts to clear out product and turn stagnant inventory back into cash is a necessary evil.

Where businesses run into trouble is when they use discounts as a method to try and increase revenue. Discounts dramatically effect your net profit margin and if you focus on revenue while losing sight of net profit you'll put yourself out of business.

Do the math before offering discounts.

Just because everyone else is offering a discount doesn't mean it's right for your business.

In order to see what a discount will do to your net profit you need to know your gross margin. Your gross margin is the difference between how much your product costs vs. how much you sell it for. Your gross margin is shown as a percentage.

Let's say you sell shoes at a 50% gross margin and you decide to give a 10% discount. How many more pairs of shoes will you have to sell at 10% off to generate the same gross profit? 25% more!

Here's a chart to give you an idea of how much more you have to sell to keep the same profits when offering discounts.

Discounts make you sell more to make the same profit.

Nobody likes to work more than they have to for the same results.

By offering discounts you're making it so that you have to sell drastically more to walk away with the same net profit at the end of the year.

Discounts as a marketing expense.

Discounts aren't inherently bad. They can be a useful tool in customer acquisition when there is a system in place to convert that new customer to a long-term repeat customer.

If you're using discounts to acquire customers it is important to maximize the lifetime value of your customers.

Know why you're offering discounts & how much they'll cost you.

Discounts can be useful to clear out inventory and acquire new customers. Discounts can also be utilized in the psychology of pricing your product if you have a high gross margin to work with.

But it's important to know why you're offering discounts and what they will do to your net profits.