Guide
How Much a Sale Discount Really Costs You (and How Many Extra Sales You Need)
Before you put 20% off, you will be able to work out how much profit you give up per sale and how many extra orders you need to sell just to end up where you started.
A discount comes out of profit, not out of price
A 20% discount sounds small. But your costs do not drop when your price does. Every dollar you take off the price is a dollar taken off your profit.
Take a candle that sells for $25 and costs you $10 to make and ship. You keep $15 per sale, which is a 60% margin. Put 20% off and the price becomes $20. Your cost is still $10, so you keep $10. A 20% price cut has cut your profit per sale by one third (from $15 to $10).
How many extra sales do you need?
Here is the question that matters: how many more units must you sell to earn the same total profit as before?
Say you normally sell 100 candles a month. At $15 profit each, that is $1,500. With the 20% discount you keep $10 each, so you need $1,500 / $10 = 150 candles. That is 50 more sales, or 50% more volume, just to break even on profit. Any sales above 150 are real gain.
The shortcut: extra volume needed = discount / (margin - discount), with both as a percentage of the original price. Here that is 20 / (60 - 20) = 0.5, or 50%.
The same discount hurts more on thin margins
Discount size and margin both change the answer. Keep the $25 candle at 60% margin and compare:
- 10% off: price $22.50, profit $12.50. You need 15 / 12.50 = 1.2 times the volume, so 20% more sales.
- 20% off: price $20, profit $10. You need 50% more sales.
- 30% off: price $17.50, profit $7.50. You need 15 / 7.50 = 2 times the volume, so 100% more sales.
Now take a product with a 30% margin: $25 price, $17.50 cost, $7.50 profit. Take 20% off and the price is $20, which leaves $2.50. You need 7.50 / 2.50 = 3 times the volume, so 200% more sales. On thin margins a discount is very hard to win back.
Check before you run the sale
Ask three questions. First, what is my profit per unit today? If you do not know your real cost including shipping and packaging, work that out first. Second, how many extra units could I realistically sell? If you usually sell 100 and the sale needs 150, be honest about whether a week of discounting can do that. Third, is there a cheaper way to get the same effect, such as a small free gift, free shipping over a set amount, or a discount only on slow stock?
If the numbers do not work, try a smaller discount. Going from 20% to 10% cut the required extra volume from 50% to 20% in the example above.
Keep the sums in one place
Write down your price, your cost per unit and the discount, then let a sheet do the arithmetic so you can compare a few discount levels in seconds. The free sale discount calculator on this site does this sum, and the Excel workbooks keep your costs and prices together so the numbers are always at hand.
All figures above are worked examples with invented numbers, not benchmarks.
