Human Resource Management

Employee Discounts

Written by Andrew Goldman for Gaebler Ventures

Employee product discounts are a great perk for your employees. Make sure the perk is in the best interests of the company and not at the expense of your customers or your bottom line.

Depending upon your product or service, you probably offer your employees some form of discount to purchase your products.

Employee Discounts

This can be a great perk for employees, as the money they save in buying product is almost as good as money earned.

In addition, you definitely want your employees to be consumers of your products or services. When your employees use your products, they are more familiar with them and can better relay information to the customer. After all, is a sales representative who sells cereal going to be more or less convincing if they've never tried the product?

How much of a discount to give, depends on the nature of your product or service. The majority of companies I've consulted for offer their products at or around cost to their employees.

The logic behind this decision is that you don't want to make money of your employees and want to encourage them to use what you're selling. The problem is that what your company considers "cost" may be below the actual cost of the product. If this is the case, you're losing money on employee discounts and with the small business, every dollar counts.

I support giving your employees as much of a discount as possible. You need to be careful; however, in making sure that the discount is not paying the employees to buy your product. Be sure to include the cost of processing the order when determining the actual cost. Your pricing models should be up-to- date and extremely thorough to begin with, but make sure you're including any additional costs that could be included with an employee purchase.

For example, in one company I consulted for, an employee from manufacturing had to physically carry the employee purchase for 10 minutes round trip to deliver the product. If you're selling your product at cost, the 10 minute walk is lost dollars.

Another problem I've seen with employee discounts is that employees can purchase product off your shelf in lieu of a customer. Make sure you have a priority system in place, that only allows the sale if you have enough product to sell to your customers. You don't want to sell a product at cost to your employee when a customer wanted that same product. This results in lost revenue and dissatisfied customers. Make sure your customers come first!

You also want to have some policies in place about the amount of product an employee can purchase. This amount should be related to how much they could personally consume. What you want to avoid is employees purchasing your product at cost to give away or sell to friends and family. Occasionally this isn't bad, but if it becomes habit, you're losing product and potential customers.

Make sure you forecast employee purchases in your demand planning. Employee purchases should be forecasted and planned for production just as any other form of demand. The idea is that you want to have the correct amount of product, if you forecast all your customers and not your employees, then your employee purchases will eat into your customer's supply.

Remember, employee discounts are a great perk for your employees and a great way to get them to use your product or service. Just be careful not to lose money or customers along the way.

Andrew Goldman is an Isenberg School of Management MBA student at the University of Massachusetts Amherst. He has extensive experience working with small businesses on a consulting basis.

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