For many SMEs in Singapore and Malaysia, discounting has become the fastest way to get attention. A 10% launch offer, a festive bundle, a flash sale, a marketplace voucher or a “DM for special price” message can feel like a simple fix when sales are slow. The problem is that discounting rarely stays as a short-term tactic. Once customers are trained to wait for the next promotion, the business starts competing against its own future revenue.

This matters because SMEs are not a small corner of the economy. In Singapore, SMEs make up 99% of businesses and employ around 71% of the workforce. In Malaysia, MSMEs contributed 39.5% of GDP in 2024, amounting to RM652.4 billion in value added, while employing 8.10 million people. When SMEs lose pricing power, it does not only affect individual business owners. It weakens jobs, supply chains, service quality and reinvestment across the economy.

Why discounts feel necessary when costs keep rising

The danger is especially real now because SMEs are already dealing with higher operating costs. In Malaysia, SME Bank’s 2H 2025 sentiment report found that 85% of micro, 83% of small and 86% of medium enterprises expected costs to rise. The report pointed to raw materials, utilities and marketing or advertising expenses as key pressure areas. Singapore businesses face their own version of this squeeze, from manpower and rental costs to volatile consumer demand in sectors such as retail and F&B.

In this environment, discounting can feel rational. If rent is due, inventory is moving slowly or a competitor is running a promotion, cutting prices can create a quick spike in orders. But revenue is not the same as profit. A business can sell more and still make less.

The hidden maths behind margin erosion

The maths is brutal. Take a simple example. An SME sells a product for S$100 with a gross margin of 40%, meaning it keeps S$40 before overheads. If it offers a 10% discount, the selling price falls to S$90. If the cost remains S$60, the gross profit drops from S$40 to S$30. That is not a 10% reduction in profit. It is a 25% reduction in gross profit per unit. To earn the same total gross profit, the business now needs to sell significantly more units.

This is why pricing has an outsized impact on profitability. McKinsey has found that, on average, a 1% price increase can translate into an 8.7% increase in operating profits, assuming no loss of volume. The reverse is also true. Small, repeated price concessions can quietly destroy operating profit, particularly for SMEs that do not have the scale, purchasing power or balance sheet of larger companies.

Why lazy discounting weakens pricing power

The issue is not that all discounts are bad. The issue is lazy discounting. Too many SMEs use discounts as a substitute for positioning, customer segmentation and pricing discipline. Instead of asking who the discount is meant to attract, what behaviour it is meant to change and whether the transaction remains profitable, they apply a blanket reduction and hope volume will make up for it.

That approach is risky in Singapore and Malaysia because customers are highly exposed to promotional mechanics. Marketplace campaigns, bank offers, loyalty apps, super-app vouchers and retail festivals have made discounts feel normal. For consumers, this is convenient. For SMEs, it creates a trap. Once a product is repeatedly promoted at 20% off, the discounted price becomes the reference price. The original price starts to look inflated, even if it was the fair price needed to cover costs.

Start with your minimum viable price

SMEs need to move from discount-led selling to margin-led pricing. The first step is to know the minimum viable price for every major product or service. This should include direct costs, payment fees, delivery costs, marketplace commissions, packaging, staff time and a fair allocation of overheads. Many small businesses track sales daily but only review gross margin monthly, if at all. That delay is dangerous. By the time the owner realises a promotion was loss-making, the cash has already left the business.

Set a discount floor before launching promotions

The second step is to create a discount floor. Every SME should know the maximum discount it can offer without damaging gross margin beyond an agreed threshold. This floor should not be based on emotion or competitor behaviour. It should be based on unit economics. For example, a retailer may decide that no promotion can push gross margin below 30%. A service business may decide that no package can be sold unless it covers delivery hours, admin time and customer support.

Stop giving discounts to customers who would buy anyway

The third step is to stop giving discounts to customers who were already willing to buy. This is where many SMEs leak margin. A returning customer who values convenience, trust or quality may not need a discount to complete the purchase. A first-time customer comparing five providers might. These two customers should not receive the same offer. SMEs can use simple CRM tools, POS data or even well-maintained spreadsheets to separate new customers, repeat customers, dormant customers and high-value customers. Discounting should be targeted at the behaviour the business wants to encourage, not sprayed across the entire customer base.

Replace blanket discounts with structured value

The fourth step is to replace blanket discounts with structured value. Instead of “20% off everything”, SMEs can use bundles, thresholds and tiered packages. A café can offer a breakfast set instead of reducing every item. A B2B service provider can create good, better and best packages, allowing price-sensitive clients to choose a basic option while higher-value clients pay for speed, support or customisation. This mirrors the pricing logic often used by software companies, where the goal is not to force every customer into one price but to match different willingness-to-pay levels.

Use smaller, more precise promotions

The fifth step is to use smaller, more precise promotions. Research from Harvard Business Review has argued that bigger discounts do not always produce better results, and that smaller, more precise discounts can sometimes perform effectively while reducing margin damage. For SMEs, this is useful because not every campaign needs to be dramatic. A 6% or 8% offer tied to a clear reason, such as a member perk, early-bird booking or limited bundle, may protect more value than a default 20% cut.

Measure promotions like experiments

The sixth step is to measure promotions like experiments, not celebrations. Many SMEs judge a campaign by sales volume, likes or footfall. That is incomplete. A useful post-promotion review should ask four questions: Did the campaign attract new customers or subsidise existing ones? Did average order value rise or fall? What was the gross profit after all costs? Did the customers return without another discount? These answers are more important than the top-line revenue number.

Use tech to spot where margins are leaking

Technology can help, but only if SMEs use it for decision-making rather than decoration. POS systems, accounting software, e-commerce dashboards and CRM platforms already contain useful pricing signals. Which products are frequently discounted? Which customers only buy during promotions? Which channels generate the lowest net margin after fees? Which bundles raise basket size without cutting price? Even basic analysis can reveal where the business is giving away value unnecessarily.

The smarter way forward for SMEs in Singapore and Malaysia

For Singapore and Malaysia SMEs, the larger lesson is that pricing should be treated as a strategic capability, not a last-minute sales lever. This is especially important as costs continue to rise and customers become more selective. SMEs cannot simply pass every cost increase to customers, but they also cannot absorb everything through lower margins.

The better path is disciplined pricing. Use discounts to clear old stock, acquire specific new customers or reward valuable behaviour. Do not use them to hide weak positioning or avoid difficult pricing decisions. Build offers that protect margin, track the true cost of every promotion and give customers reasons to pay more through trust, speed, service, quality or convenience.

Discounting may win attention, but attention is not the same as a sustainable business. For SMEs in Singapore and Malaysia, the real competitive advantage is not being the cheapest. It is knowing exactly when to discount, how much to discount and when to hold the line.

---

Also read: Why Singapore SMEs should see Johor as a growth bridge, not just a cheaper backyard