First Person: How to Survive Discounting when You Compete on Price

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As a small business consultant and coach since 2003, I have often warned my clients about the fallacy of the idea that "I can make it up in volume." It seems to be a common belief in small business management, in particular of retail stores. I watched one of my competitors in El Paso, whom I was jealous of because he was so much larger close his doors while I still operated.

Just a few decades ago, you probably could 'make it up in volume.' That was because you could get volume discounts that consumers didn't get. Today you have to be careful about discounting to compete on price.

When I had my printer maintenance company in El Paso, the computer industry had already changed so much that consumers could shop buy for less than I could as a dealer. Prices from major distributors like Ingram Micro and Merisel were higher than consumers paid online. As a small business, we did not purchase enough to rate a better discount from distributors.

Customers Shopped Us to Tell Learn What to Buy

My frustration was that customers could go online and purchase cheaper than we could from distributors. Because we bought online too then marked it up to pay for our time, customers often used our advice to buy from discount houses.

Why You Normally Can't Make It Up in Volume

There are two misunderstandings small businesses selling products generally have. First, they focus on their cost of goods. They miss that they also need to cover overhead.

Understanding Overhead

When you look at a very simple P&L (profit and loss statement) you find overhead as expenses.

Sales

-Cost of goods

Gross Profit

-Expenses

Net Profit

Typical Expenses or Overhead

- Rent

- Utilities

- Gas for vehicles

- Vehicles and equipment

- Insurances

- Taxes & fees

- Executive salaries

- Administrative wages

- Freight & postage

- Memberships

- Janitorial

- Printing & office supplies

- Furniture

- Advertising and marketing

- Inventory shrink

- Alarm company

Also, small businesses can't normally afford the volume needed for super steep discounts. In 1984, I was marketing manager at Gateway Computer, a small computer chain of 12 business centers, based in Huntington Beach, California. We were a C level dealer for IBM PCs. Fortune 100 companies purchased most of our computers. Then IBM raised their monthly volume required to stay at their steepest discount. The company finally failed when they couldn't move enough products fast enough.

8 Ways You Can Discount and Still 'Make It Up in Volume'

Having recently eaten at a Norm's Restaurant, I realized that there are some times when your small business can survive deep discounting. The following are ways you can cut your profit margin thin to compete on price:

- Tightly control your facilities rent

- Sell services to cover your overhead

- Discount only after you know that you have passed your breakeven point, i.e. you covered your overhead for the year

- Tightly control all other overhead

- Minimize your payroll expenses

- Add profit through upsells of add-ons that people won't bother shopping for

- Sell packages that include more profitable items

- Operate your business in multiple shifts so your space is making money more than eight to ten hours a day

Be wary about cutting prices to remain competitive. Most small businesses can't make it up in volume because they can't sell enough to get the lowest prices. They also often forget to account for covering their overhead when they try to be the cheapest. Use the 8 options above when you compete on price to remain profitable despite low profit margins.

*Note: This was written by a Yahoo! contributor. Do you have a story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.

More from this contributor:

First Person: The 'Volume Fallacy' Can Sink a Small Business

First Person: Evaluating Profitability Per Square Foot for a Small Business

First Person: Cut Expenses or Increase Sales?

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