The discount formula
The discount comes entirely out of your margin, not out of the price, so the profit per unit falls much faster than the price does.
Worked example
A product sells for $100 and costs $60, so it makes $40 a unit (a 40% margin). A 20% discount brings the price to $80, but the cost is still $60, so profit per unit halves to $20 - a 25% margin. To make the same $8,000 gross profit you make from 200 units at full price, you need to sell 400 units on sale: a 100% increase in volume, just to stand still.
Discount vs. margin table
Sales increase needed to keep the same gross profit:
| Discount | 30% margin | 40% margin | 50% margin | 60% margin |
|---|---|---|---|---|
| 5% | 20% | 14.3% | 11.1% | 9.1% |
| 10% | 50% | 33.3% | 25% | 20% |
| 15% | 100% | 60% | 42.9% | 33.3% |
| 20% | 200% | 100% | 66.7% | 50% |
| 25% | 500% | 166.7% | 100% | 71.4% |
| 30% | Loss | 300% | 150% | 100% |
Lower-margin businesses get hurt fastest. At a 30% margin, a 30% discount means selling at cost - every order is work for nothing.
When a discount can still make sense
- Clearing dead stock. If the alternative is writing it off, any price above the cost of selling it is a gain.
- Acquiring customers who come back. A first-order discount can pay off if repeat purchases follow - check it with the LTV calculator.
- Raising order value. "10% off orders over $150" protects margin better than a sitewide discount, because it only applies to bigger baskets.
Alternatives to a straight discount
Free shipping thresholds, gifts with purchase, bundles and limited-time bonuses often lift sales while costing less than a percentage off, because the perceived value is higher than the cost to you. Whatever you choose, run the numbers first - and check your break-even point at the sale price.
Frequently asked questions
How much do sales need to increase to cover a discount?
Divide your profit per unit before the discount by your profit per unit after it, then subtract 1. At a 40% margin, a 20% discount needs a 100% increase in units to earn the same gross profit.
Is a 20% discount the same as a 20% loss of profit?
No - it is usually much more. The discount comes out of the margin, so on a 40% margin product a 20% discount cuts profit per unit in half.
Does this include fixed costs?
No. It compares gross profit (price minus unit cost), which is the right view for a short promotion where fixed costs do not change.