How much profit do I really lose when I give a 10 percent discount?

Sellers often say, "It is only 10 percent." It sounds small. The price on the page barely moves. But the effect on your profit is far bigger, and the reason is simple. Your costs do not drop when your price does.

Start with one item

Say a candle sells for Rs 500 and costs you Rs 300 in all (product, packing, shipping, fees). That leaves Rs 200 profit.

Now give 10 percent off.

• 10 percent of Rs 500 = Rs 50
• New price: Rs 450
• Your cost is still Rs 300
• New profit: 450 - 300 = Rs 150

You gave up Rs 50 of price, but that Rs 50 came entirely from profit. Profit fell from Rs 200 to Rs 150.

The shock number

Rs 50 out of Rs 200 is 25 percent. A 10 percent price cut produced a 25 percent profit cut.

That ratio depends on your margin. The thinner your margin, the more painful a discount becomes. Imagine a product with Rs 100 profit on a Rs 500 price. The same Rs 50 discount would remove half the profit.

Why this happens

Think of the price as two buckets, cost and profit. The discount can only come out of the profit bucket, because the cost bucket is already spent on the product, the packing and the courier. Whatever you give away, you give away from profit.

Scaling it up

Say you sell 100 units in a month.

• At full price, profit is 100 x 200 = Rs 20,000
• At 10 percent off, profit is 100 x 150 = Rs 15,000

You lost Rs 5,000 for the same number of units. If the discount only moves your existing customers from full price to discounted price, you have given away Rs 5,000 for nothing in return. It only makes sense if the offer brings in additional buyers who would not have come otherwise. How many more? That is what extra sales needed to pay for a discount works out.

Questions to ask before you discount

• Who is the discount for? New buyers, or everybody including people who would have paid full price?
• Does the offer end? A discount with no end date becomes the new price in the customer's mind.
• Could I give something that costs me less, like a small free gift or free shipping above a basket value? See free gift versus discount.
• Is the item slow-moving stock that I want to clear anyway? Then a discount might be the right tool.

A sensible way to discount

Choose a discount only after you know your numbers. If you do not know your cost per order, start with how to calculate contribution per order. Once you know it, you can say with certainty how much room you have before an offer turns into a loss.

Finally, remember that deep discounting also trains customers to wait for the next sale. Our article coupons that actually move stock offers a calmer approach. A 10 percent discount is not wrong. Giving it without knowing the profit it costs is where the trouble starts.