A discount that quietly shrinks profit

Ten percent off is not a tenth of the business

A 10 percent discount sounds modest. It sounds like something a shop can absorb without much thought.

Put numbers on it. A product sells for 1,000 and earns 200 of profit after the cost of buying or making it. That is a 20% margin. A 10% discount takes 100 off the price. The cost is the same, so the profit falls from 200 to 100.

The discount was a tenth of the price. It is half of the profit. That is the gap between how a discount feels and what it does.

The reason is simple. A discount comes out of the margin, which is a small slice of the price. The bigger slice, the cost, does not move. So a given percentage off the price is a much larger percentage off the profit.

You can see it with one line of arithmetic:

New profit per unit = original profit − discount amount

With a profit of 200 and a discount of 100, the new profit is 100. With a discount of 150, it is 50. With a discount of 200, it is zero, and the sale is a gift.

The discount calculator shows the sale price from the shelf price and the percentage off. The profit margin calculator shows what the sale price leaves after your costs. Used together, they answer the real question: what is left for me?

How many extra sales you need to break even on a discount

Most sales are justified by volume. The idea is that a lower price sells more, so the total profit holds up or grows. That can be true. It needs a number.

The formula is below. Margin and discount are both percentages of the original price.

Extra volume needed = discount ÷ (margin − discount)

For a 20% margin and a 10% discount: 0.10 ÷ (0.20 − 0.10) = 1.0, which is a 100% rise in units. You need to sell double.

Here is how the number changes with margin and discount.

• 20% margin. A 5% discount needs 33% more units. A 10% discount needs 100% more. A 15% discount needs 300% more. A 20% discount cannot be recovered.
• 30% margin. A 5% discount needs 20% more units. A 10% discount needs 50% more. A 20% discount needs 200% more.
• 40% margin. A 5% discount needs 14% more units. A 10% discount needs 33% more. A 20% discount needs 100% more.
• 50% margin. A 10% discount needs 25% more units. A 20% discount needs 67% more. A 30% discount needs 150% more.

Notice two things. A higher margin gives more room. And the cost of a discount grows faster than the discount itself. Going from 10% off to 20% off on a 40% margin does not double the volume needed. It triples it, from 33% to 100%.

Use this table before a sale, not after. If you do not believe a 10% discount will double your sales, a 20% margin product should not be discounted by 10%.

Fees and shipping still have to come out

The simple example above ignores the other costs of a sale. Real orders carry payment fees, packaging, shipping and sometimes a marketplace commission. Some of these scale with the price, and some do not.

Rebuild the example. A product sells for 1,000. It costs 700 to buy. Shipping is 60, packing is 15 and the payment fee is 2.5% of the price. The fee is 25. The profit is:

1,000 − 700 − 60 − 15 − 25 = 200

Now apply a 10% discount. The price is 900. The fee falls a little to 22.50. Shipping and packing stay the same, because the parcel weighs the same.

900 − 700 − 60 − 15 − 22.50 = 102.50

The profit fell from 200 to 102.50, which is a drop of about 49%. The discount took 10% off the price. It took roughly half off the profit.

Fixed costs also matter. Suppose rent, tools and wages add up to 20,000 a month. At full price, each sale contributes 200, so you need 100 sales to break even. At the discounted price, each sale contributes 102.50, so you need about 195 sales. The discount nearly doubles the break-even.

The break-even calculator shows this change directly. Enter the fixed costs, the price and the variable cost, then repeat with the sale price. The gap in the answer is the price of the offer.

Stacked discounts bite harder than they look

Offers rarely come alone. A shop runs a 10% sale. A newsletter code adds 10% more. A first-order coupon adds another 5%. Customers apply them all.

Percentages multiply, they do not add. A 10% sale and a 10% code give 0.9 × 0.9 = 0.81, which is 19% off, not 20%. On the 1,000 product, the price falls to 810.

810 − 700 − 60 − 15 − 20.25 = 14.75

Profit is 14.75 per unit. The offer has taken 93% of the profit. Add a 5% coupon on top and the price is 769.50. The unit now loses money.

Three rules help:

1. Decide whether codes can be combined. Most shop platforms allow you to turn stacking off.
2. Set a minimum margin that no combination can break. Many platforms let you set a maximum discount per order.
3. Test the lowest possible price. Apply every offer you run in a test cart and look at the final number.

Set a floor price before you set a sale

The most useful number in any promotion is the lowest price at which you still earn what you need. Work it out once and write it down.

Floor price = fixed amounts per sale ÷ (1 − percentage costs − minimum margin)

For the product above, fixed amounts per sale are 700 + 60 + 15 = 775. The percentage cost is the 2.5% payment fee.

• Zero profit floor. 775 ÷ (1 − 0.025) = about 795. Below this price, you lose money on every sale. That limits the discount to about 20.5%.
• 10% margin floor. 775 ÷ (1 − 0.025 − 0.10) = about 886. That limits the discount to about 11.4%.
• 20% margin floor. 775 ÷ (1 − 0.025 − 0.20) = 1,000. At a 20% margin, no discount is possible.

Put the floor in the same note as the shelf price and the cost. When someone proposes a sale, the answer to "how deep can we go?" is already written. It also helps to read the companion article on the selling price that still loses money, which shows how to find each of these costs.

Raising the price back is harder than cutting it

Cutting a price takes a moment. Restoring it takes a larger move than the cut.

If you cut a price by 20%, you need to raise the new price by 25% to get back to where you were. The formula is the discount divided by (1 − discount).

• A 10% cut needs a rise of 11.1% to recover.
• A 20% cut needs 25%.
• A 30% cut needs 42.9%.
• A 50% cut needs 100%.

Customers also remember. A shop that discounts every month trains buyers to wait. After a few rounds, the sale price becomes the real price in the buyer's mind, and the full price looks like a mistake. Frequent sales can shrink margin for good.

If you do run a sale, make it short, say why it exists, and end it on the date you announced. A clear end teaches customers that the full price is the price.

Other ways to give value without cutting the price

A price cut is only one tool. Others can win the same buyer with less damage to margin.

• Bundles. Sell two related items at a combined price. If each item has a 40% margin, a bundle at 10% off still keeps a healthy margin and raises the order value.
• Gift with purchase. A low-cost item that buyers value, given above a minimum order. If it costs 40 to you and feels worth 150 to the buyer, it beats a 15% discount.
• Free shipping above a threshold. It lifts the basket size. Check that the extra margin on the larger order pays for the shipping.
• Loyalty points. The reward is delayed and can be tied to a repeat purchase.
• Early access or limited editions. These add value without touching the price.
• Buy one, get one at a lower price. A "buy one, get one at half price" offer is an average discount of 25% across the pair. Do the sum before you run it.

Each of these has its own cost. The point is to choose the one with the best return for the cost, not to default to a percentage off.

Clearing old stock is a different decision

Sometimes a deep discount is right. Old stock ties up cash, takes shelf space and may go out of date. The cost of buying it is already spent and cannot be recovered.

For clearance, the comparison is different. The question is not whether the sale price beats the original margin. It is whether the sale price beats the cost of holding the stock for another month, plus the chance that it never sells.

If an item costs 700, has sat for six months and costs 10 a month to store, a sale at 600 may be sensible. The loss of 100 is smaller than another year of storage and the risk of writing it off. Record it as a clearance decision, with a quantity and an end date, so it does not become the habit for the whole range.

A six-step test before any discount

1. Write the shelf price and the cost per unit. Include every variable cost, such as fees, packing and shipping.
2. Find the current margin. Profit per unit divided by the price.
3. Find the profit per unit at the sale price. Use the discount calculator for the price, then the margin tool for the profit.
4. Compute the extra volume needed with the formula above.
5. Ask whether that volume is believable. Look at past sale results, not hopes.
6. Check the floor price and the stacking rules. Make sure no combination of codes goes below the floor.

If the test fails, change the offer. A smaller discount, a bundle or a gift with purchase may pass the same test.

If you are the shopper

The same maths helps buyers. A sign that says 30% off tells you little. Check three things.

• What was the price before? Look at the price history, not the crossed-out number. A price that was raised before a sale is not a discount.
• What is the final price? Add shipping, fees and any membership. A 20% discount with shipping that adds 10% to the price is closer to 12% off.
• Do you need it? A discount on a thing you do not need is a cost, not a saving.

For multiple offers, remember that percentages multiply. A 20% sale and a 10% code give 28% off, not 30%. The discount calculator shows the final price in one step.

Worked example from start to finish

Dev runs a small online shop. A speaker costs him 700. He sells it at 1,000 and plans a 15% weekend sale to move stock.

Frequently asked questions