Why discounts cost more than they appear to
A discount comes entirely out of profit, because your cost does not fall. On a product with a 40% margin, a 20% discount removes half of the profit on each unit, so you have to double sales to earn the same money. The lower your margin, the steeper this gets.
That does not make discounts wrong. A sale can clear aging stock, win customers who return later or fill idle capacity. The point is to know the required lift before you start, so you can judge whether the promotion is realistic.
The formulas
Discounted profit per unit
New profit = Price × (1 − Discount ÷ 100) − Cost
Units needed
Units needed = (Current profit per unit × Current units) ÷ New profit
Sales increase
Increase % = (Units needed − Current units) ÷ Current units × 100
Worked example
A store sells 200 units a month at $100 with a $60 cost, and is considering a 20% off promotion.
- Today: $40 profit per unit × 200 = $8,000.00.
- Discounted price: $80.00, leaving $20.00 profit per unit, down from $40.00.
- Units needed: $8,000 ÷ $20 = 400 units.
- Sales increase required: 100%.
A "20% off" sale has to double unit sales simply to match the profit the store already earns.
What this calculation leaves out
- Customers who would have paid full price. They receive the discount too, which is a pure cost.
- Sales pulled forward. Customers may stock up now and buy less next month.
- Repeat business. Good promotions can bring in long-term customers. The customer lifetime value calculator helps put a value on them.
- Extra costs. Advertising the sale, extra shipping and payment fees all raise the bar further.
Frequently asked questions
What is the maximum discount I can offer?
Without selling at a loss, your discount has to stay below your margin. With a 40% margin, a 40% discount means you sell at cost, and no volume can make that profitable on its own.
Are coupons better than a site-wide sale?
Often, because a targeted offer reaches price-sensitive buyers and fewer full-price customers. This calculator treats every unit the same, so a targeted offer may need less lift than shown.
Should I use gross profit or net profit here?
Use the costs that change per unit. Fixed costs stay the same whether or not you run a sale, so they do not change the comparison.
How do I offer a bundle instead?
Enter the bundle price as the regular price and its combined cost as the unit cost, then test different discounts. Bundles often protect profit better because they raise the amount spent per order.