What a Discount Really Costs
A discount comes straight out of your gross profit, not out of your price. On a 40% margin, a 10% discount takes away a quarter of the profit on every sale. This shows how much more volume you need just to end up where you started.
Compares gross profit only, assuming your cost per unit does not change with volume. It does not include extra costs of the added sales or any customers who would have paid full price anyway. Estimates only. This calculator is for educational purposes and is not financial, tax or legal advice.
Why discounts cost more than they look
Your cost does not go down when you discount. The whole discount comes out of the gross profit. Say an item sells for $100 with a 40% gross margin, so it costs you $60 and you keep $40. Take 10% off and you sell it for $90. It still costs $60, so you keep $30.
You gave the customer $10, but your profit fell from $40 to $30, a 25% cut. To earn the same $40 of total profit you now need to sell 4 items for every 3 you sold before: 33% more volume, just to break even on the discount.
The formula
Extra volume needed = discount ÷ (gross margin − discount). With a 40% margin and a 10% discount: 10 ÷ (40 − 10) = 33.3%. If the discount is as big as your margin, no amount of extra volume makes up for it, because every sale earns nothing.
| Gross margin | 10% discount | 20% discount |
|---|---|---|
| 30% | +50% volume | +200% volume |
| 40% | +33% volume | +100% volume |
| 50% | +25% volume | +67% volume |
| 60% | +20% volume | +50% volume |
When a discount still makes sense
A discount can pay off when it brings in customers who come back at full price, clears inventory that would otherwise be written off, or fills capacity that costs nothing extra to use. Those are real reasons. "Sales are slow" on its own usually is not, unless the volume really does jump by the amount above.
Sources: standard gross margin arithmetic. Examples and the table on this page are calculated by Simple Money Advice; no outside statistics are used.
Frequently Asked Questions
How much more do I need to sell after a 10% discount?
It depends on your gross margin. Divide the discount by your margin minus the discount. At a 40% margin, 10 divided by 30 means 33% more volume. At a 30% margin you need 50% more, and at a 60% margin, 20% more.
Why does a 10% discount cut profit by more than 10%?
Because your cost stays the same. On a $100 item with a $60 cost, the $10 discount comes entirely out of the $40 profit, which drops to $30. That is a 25% cut in profit per sale from a 10% cut in price.
What happens if the discount is bigger than my margin?
Then every discounted sale loses money and no amount of extra volume makes up for it. A 40% discount on a 40% margin sells the item at exactly your cost.
Does this include the cost of making more units?
It compares gross profit, so it already counts the cost of each extra unit you sell. It does not count anything else the extra volume might need, such as more staff hours or shipping capacity.