Discount Math

Updated 2026-08-31 · ProfitKit

A 20% discount does not reduce your profit by 20%. It reduces it by 20% of the price, and that money comes out of your margin, which is a much smaller number. This is why discounting feels harmless and often is not.

The arithmetic

Item sells for $40 with $10 of contribution margin — a 25% margin. Offer 20% off:

• New price: $32
• Costs unchanged: $30
• New contribution: $2

Profit fell by 80%. You now need five times the unit sales to make the same money.

Break-even volume for a discount

Units needed multiplier = Old margin ÷ (Old margin − Discount amount)

"Impossible" means the discount equals or exceeds your entire margin — every additional sale loses money, so no volume increase can rescue it. A seller on a 20% margin offering 20% off is working for free.

Why sales still make sense sometimes

Not every discount is meant to be profitable on its own:

• Clearing dead stock. Cash back from unsold inventory beats storage, even below cost. The money is already spent; recovering some of it is the goal.
• Acquiring a repeat customer. Justifiable only if you know the repeat rate. "They might come back" is not a number.
• Hitting a volume threshold that unlocks a better supplier price or shipping rate.

What does not make sense is discounting to compete on price with no plan, on a margin too thin to absorb it.

Better tools than a percentage off

• Bundles. Raise order value while your fixed per-order costs stay the same. Two items in one parcel is one postage and one payment fee.
• Free shipping over a threshold. Costs you the postage, not a slice of every item's margin.
• A cheaper entry product. Priced for profit from the start, rather than a discounted version of your main one.

Before any promotion

Calculate the discounted contribution margin, then the volume multiple you would need. If the multiple is above about 2×, the promotion is very unlikely to pay for itself — the traffic increase required is larger than a discount alone produces.

Do the calculation