How cheap can perfume be? When discounts destroy the market – and ultimately others pay the price

Why permanent discounts in the perfume trade can destroy more than just margins – and why, in the end, retailers, suppliers, brands, and even financially sound companies pay part of the bill.

A fragrance officially costs 220 euros but is continuously sold online for 149 euros. To customers, this sounds like a good deal. But permanent discounts can destroy margins, devalue brands, displace specialist retailers – and ultimately even prove costly for those suppliers who enabled this price war for years with a constant supply of new goods.

A niche perfume officially costs 220 euros but is offered online for a continuous price of 149 euros. Of course, the customer is happy. The more intriguing question is: How can a company consistently sell so cheaply – and who ultimately pays the difference?

The current developments at Beautywelt GmbH provide a good opportunity to discuss this. Following an insolvency application, judicial proceedings with protective measures are underway. This does not prove that Beautywelt became insolvent due to its discount policy. However, the published figures show how vulnerable a retail model can become when high turnover, low margins, and high liabilities coincide.

23 million euros in revenue – impressive, right?

The provider named Beautywelt generated approximately 23.07 million euros in revenue in the 2022/23 financial year. The net profit was only about 36,700 euros – approximately 0.16 percent of revenue.

About 15.87 million euros in material expenses were offset against revenue. Simply put, this left a gross profit of about 7.2 million euros or 31.2 percent. At the same time, around 6.45 million euros in other operating expenses, more than one million euros in personnel costs, and significant interest expenses were incurred. Additionally, over 611,000 euros in investment income were reported.

This shows: Revenue is not profit. And high revenue does not necessarily mean a healthy company.

The brutal truth behind a 20 percent discount

Let's simplify and apply the former gross profit margin to a sale of 100 euros. Around 68.80 euros are notionally allocated to the cost of goods sold. This leaves 31.20 euros in gross profit.

From this, advertising, payment providers, shipping, packaging, warehousing, personnel, IT, returns, administration, and interest must be paid. So, these 31.20 euros are by no means profit.

If the same item is sold for 90 euros instead of 100 euros, only 21.20 euros in gross profit remain. A ten percent discount thus destroys about 32 percent of the gross profit. At an 80 euro selling price, only 11.20 euros remain. A 20 percent discount in this example costs about 64 percent of the original gross profit.

The customer sees "20% cheaper." However, the retailer potentially loses almost two-thirds of the money from which they must finance their operations.

Cheaper and cheaper, more and more – until revenue becomes a necessity

If you earn less on a sale, you have to sell more. With an additional ten percent discount, our retailer needs approximately 47 percent more sales to achieve the same original gross profit. With a 20 percent discount, they would have to sell almost three times as many products.

But more orders also mean more advertising, shipping, payment fees, warehouse work, and service. This creates a spiral: Low prices require more revenue. More revenue costs more money. These costs, in turn, demand even more revenue.

At some point, growth is no longer an expression of economic strength, but a prerequisite for the system to continue operating.

When 149 euros suddenly becomes the "true" price

A niche perfume with a recommended retail price (RRP) of 220 euros, which is practically available everywhere for 149 euros, is psychologically no longer a 220-euro fragrance at some point. Its perceived market price is 149 euros.

The specialist retailer who charges 220 euros suddenly appears expensive – even though they only calculate prices in a way that allows for advice, staff, inventory, and service to be paid for.

Retailers who permanently offer discounts therefore not only reduce their own margin. They change the price perception of an entire brand and thus the economic possibilities for all retailers who carry that brand.

The first victims are not in any balance sheet

This is precisely where the "casualties" of a discount battle arise. Personal advice takes time. An exceptional assortment ties up capital. Testers cost money. Perfume samples and decants must be produced and shipped. A specialized retailer for niche fragrances must also discover unknown brands and carry fragrances that do not sell hundreds of times a day.

When comparing prices, the customer only sees: same bottle – different price. What they don't see: different business model – different service. If decisions are only made based on the cheapest price, then at some point, precisely those retailers who make advice, selection, and discovery possible will disappear.

Suppliers see everything – and still deliver

No retailer can sell huge quantities of discounted goods for years if no one supplies them. Manufacturers, distributors, and wholesalers know their customers. They see the shops and the prices. Of course, they also see when products are permanently offered 20, 30, or more percent below the RRP.

Nevertheless, the next delivery often leaves the yard. Why? Because a retailer who orders for 300,000 or 500,000 euros looks fantastic in sales statistics. Large orders help achieve annual targets, move inventory, and can trigger bonuses.

At this point, commercial ambition can quickly turn into revenue greed. One might see very clearly that the enormous quantities are precisely generated because this retailer sells cheaper than almost all others. As long as they pay, deliveries continue.

The question is: How sustainable is revenue that is bought by destroying one's own pricing structure?

Preaching luxury – and simultaneously fueling price erosion

It becomes particularly contradictory when distributors demand testers, minimum orders, training, and brand maintenance from specialist retailers – but at the same time continue to supply a large discounter.

The specialist retailer advises the customer, lets them try the fragrance on their skin, and conveys the brand's story. Afterward, the customer searches online and finds the same bottle 50 euros cheaper.

The specialist retailer did the work. The discounter gets the sales. The distributor records the quantities.

In the short term, this looks wonderful. In the long term, the distributor saws at their own retail network. Anyone who pits loyal retail partners against a permanently discounting major customer for years should not be surprised by later delistings.

The favorite customer suddenly becomes a very expensive customer

The published Beautywelt balance sheet shows the magnitude that supplier financing can reach. As of June 30, 2023, there were approximately 2.01 million euros in liabilities from deliveries and services. A year earlier, it was about 568,000 euros.

These historical values do not indicate which claims are currently outstanding in the insolvency proceedings. Nevertheless, the principle is important: The supplier delivers today, the retailer pays later. This is normal trade – at the same time, the supplier finances part of the business.

If the key customer later runs into difficulties, outstanding invoices can become insolvency claims. Then, the celebrated revenue generator may become a damn expensive customer.

When others end up paying along

Insolvency doesn't mean an entrepreneur just presses a button and their debts disappear. Nevertheless, the economic consequences are spread across many shoulders: Suppliers can lose claims, business partners have to cope with write-offs, and outstanding wages can be covered for up to three months by insolvency benefits. These are paid by the Federal Employment Agency but are financed by employers' contributions.

This becomes particularly bitter when a company has previously bought market share for years with aggressive prices, against which conservatively calculating competitors could barely compete. Then it becomes clear: The benefits of growth are initially concentrated within the company – the consequences of failure, however, can be distributed among many parties involved.

Who actually won this discount battle?

The customer temporarily got a cheaper bottle. The retailer generated revenue. The distributor sold large quantities. But when the system fails, the equation looks different: Suppliers risk defaulting on receivables, other retailers have suffered from a destroyed price level, brands lose their price integrity, and customers hardly accept the original RRP anymore.

Then one has to ask: Was this seemingly fantastic major customer really so valuable?

A retailer with 500,000 euros in annual orders can be worse off in the long run than ten smaller, profitable, and reliable retailers whom they pressure with their prices.

Brands are not blameless either

Manufacturers also want to grow: more retailers, more countries, higher minimum orders, larger annual targets, and always more goods in the market. However, if at some point there are more goods in the market than can be sold at regular prices, the price war begins.

Retailers need to turn over their inventory, distributors need to meet their targets, and manufacturers need to continue growing. Discounts are therefore often just the visible end of a longer chain of over-distribution, sales pressure, and short-term growth thinking.

Those who demand luxury prices must also control how much goods they place in which market. A beautiful bottle and a high RRP alone do not make a luxury brand.

A good price is not the problem

Of course, a discount is nothing reprehensible. At scent amor, we also reduce products when brands leave the assortment, packaging changes, or remaining stock is sold off.

The difference lies between targeted reduction and permanent discount as a business model. If practically everything is constantly reduced, a customer should therefore rightly ask: How does this company actually finance its service, its employees, its inventory, and its future?

A healthy company must make money. That's not greed. It is the prerequisite for paying its bills and reliably serving its customers tomorrow.

Why scent amor deliberately avoids every price war

After more than two decades in the international perfume trade, I have seen many brands, retailers, distributors, and business models come and go. One insight has been repeatedly confirmed: Large revenue is never automatically a sign of quality, success, or economic stability.

At scent amor, we have therefore consciously decided against permanent price competition. Our aim is a curated selection of exceptional niche perfumes, well-founded fragrance advice, and the opportunity to discover many fragrances on your own skin first through decants and samples.

We will not be the cheapest provider for every fragrance. We don't even want to be. A good specialist perfume retailer must be able to earn a living by offering its customers real added value, expertise, and long-term reliability.

Perhaps that is precisely the most important insight from this discount battle:

The cheapest price can be found in a few seconds. The value of a healthy, independent, and competent specialist retailer is often only recognized when it has disappeared.

Georg R. Wuchsa
Curator and Founder of scent amor

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