Discounts are easy to describe as a percentage of the selling price. The effect on the amount left after direct costs can be much larger. Before deciding whether a promotion is worthwhile, separate price, cost and contribution.
Start with one simple sale
In an illustrative example, a product sells for $100 and its direct variable cost is $70. Each sale contributes $30 towards fixed costs and profit. A 10% discount lowers the price to $90. If the variable cost stays at $70, contribution falls to $20.
To match the original $30 contribution, the business would need to sell 1.5 units at the discounted price for every unit previously sold. That is a 50% increase in volume, assuming the unit cost remains unchanged.
Try the numbers / Illustrative only
What changes with a discount?
A simplified illustration. Assumes unchanged variable unit cost and compares contribution before fixed costs. It does not predict customer demand, capacity or business results. Use amounts on a consistent tax basis.
Ask what the discount should achieve
A discount may have a clear purpose: moving a product range, encouraging trial or changing an order pattern. Define that purpose first. Then ask how success will be measured and what it costs to achieve it.
- Will the offer create additional sales, or reduce the price of sales that would have happened anyway?
- Will delivery, returns or support costs also change?
- Will customers expect the lower price to continue?
- Could you improve the offer without reducing its selling price?
Review the whole result
Compare contribution over the offer period, including changes in volume, product mix and directly related costs. Revenue alone cannot explain whether a promotion met its commercial objective.
Explore our pricing strategy service for a structured review of discounts and commercial terms.