In evaluating whether a company should discount their products, do we need to consider impact on costs? Or would this only impact revenue? I imagine there might be a one-time investment cost like marketing campaign to say we are having a sale etc..but if it’s a long-term discount policy then should we consider change in costs?
Hi there,
It depends on the objective.
If the objective is to increase profits, then you would have to calculate the profits for both scenarios (with or without the discount). In this case, you should also calculate the new costs with the discount, given that discounts would likely increase volume and thus variable costs. There may also be additional fixed costs (eg marketing) as you mentioned.
If the goal is solely to assess revenues in the two different scenarios and there are no financial constraints that could impact the possibility to offer discounts, then you would not need to calculate costs.
Hope this helps,
Francesco
Hey,
Any change in price will directly impact revenue and costs. And due to this there will be an impact on overall profit.
So, take the hint from the case whether you need to assess revenue & costs both and hence profit as well or just impact on revenue.
Hi there,
The decision here completely depends on the area under the curve that you get as you change prices.
You need to understand the margin (yes, this includes the variable cost) and the volume of the product. Take the difference in margins (from offering a discount) and the added volumes. If the multiplication of this is greater than before, then you should do a discount!
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