From the finance director's chair
The true cost of a discount: the volume you need just to stand still
"It's only 10%." It almost never is. Here's the math your customer hopes you won't do.
- A discount comes straight out of your margin, because the product costs the same to make.
- At a 30% gross margin, a 10% discount cuts gross profit per sale by a third, and needs 50% more volume to break even.
- Formula: extra volume needed = discount ÷ (margin − discount).
Why "only 10%" is the wrong way to think
When you cut the price, the cost of the product doesn't move. So the whole discount comes out of the slice you keep. If that slice was small to start with, a modest discount takes a huge bite out of it.
Quick math: the $100 product
You sell at $100. The product costs $70. You keep $30, a 30% gross margin (if margin vs markup is fuzzy, see this guide).
Give 10% off: the price is $90, the cost is still $70, you keep $20. Your profit per sale fell by a third. To earn the same $30 × 10 sales = $300, you now need 15 sales instead of 10: 50% more volume.
The formula: extra volume needed = discount ÷ (margin − discount). Here: 10% ÷ (30% − 10%) = 50%.
The same math at Halvard
In our course, Halvard's Pro machine sells for $11,000 and costs $6,600 to build, a 40% margin. A 12% discount takes the price to $9,680. Halvard now keeps $3,080 instead of $4,400 per machine: 30% less profit, from a "12%" discount. To earn what 10 full-price machines earned, it has to sell about 14.3, so in practice 15. That assumes each machine still costs $6,600 to build and the extra customers actually exist.
When a discount does make sense
- The extra volume is real, and you can deliver it without extra cost.
- It wins a customer whose future full-price orders more than pay it back.
- It clears stock that would otherwise be written off.
- You get something back: faster payment, a longer contract, a bigger order.
The opposite also works: a 3% price increase at a 30% margin adds 10% to profit per sale. Price is the most powerful lever on the P&L, in both directions.
Why it matters to you
If you approve discounts, run the formula before you say yes. And watch the variance report afterwards: discounts often show up as "revenue on budget" while margin quietly slips (see reading a variance report).
Before I approve a discount, I ask one thing: what do we get in return? A discount with nothing attached is just a price cut with better branding.
"What's our gross margin on this product, and how much extra volume does this discount need?"