I own a few retail stores and need to start offering some discounts to be more competitive with my competitors. I've decided to use cash back coupons as a guide for the discounts. My plan is to offer cash back on every transaction (except for transactions when a customer redeems their rewards). The cashback will be 7-10%. Let's use 10% for the purpose of this example. If my average gross margin right now is 50%, would my future margins simply go down to 40% after the rewards are added into the equation?
Yes.
Let's assume:
CURRENT
Gross Sales $30.00
Cost of Goods $15.00
Net Profit $15.00
Profit Margin 50.00%
NEW DISCOUNT PROGRAM
Gross Sales $30.00
Discount $3.00
Cost of Goods $15.00
Net Profit $12.00
Profit Margin 40.00%
