A 20% discount on a €100 item leaves a price of €80. Any discount calculator will tell you that, and it is correct. What it will not tell you is the part that matters: if your gross margin on that item was 40%, the discount has just cut your profit per sale in half, and you now need to sell twice as many to earn the same money.
That gap between "the customer saves 20%" and "we lose half our profit" is where most small businesses underestimate discounts. This article walks through the arithmetic, the assumptions behind it and a few rules that keep discounts from eating the year.
Why a discount hits profit harder than price
A discount is taken from the selling price. But your costs do not move when you give it. The supplier still charges the same, the hours still take as long, the materials still cost what they cost. So every euro of discount comes entirely out of your gross profit.
Take a small IT service company that sells a setup package for €1,000. Its direct cost (hardware, licences and the technician's time) is €650. That is a gross profit of €350, or a 35% margin.
Now it offers 10% off:
| Without discount | With 10% discount | |
|---|---|---|
| Price | €1,000 | €900 |
| Direct cost | €650 | €650 |
| Gross profit per package | €350 | €250 |
| Change in profit | −28.6% |
The price fell by 10%. The profit fell by almost 29%.
If the company normally sells 20 packages a month, it earns €7,000 in gross profit. To earn the same €7,000 at €250 per package, it has to sell 28 packages, which is 40% more.
The formula
The extra volume you need to stand still after a discount is:
Required sales increase = Discount ÷ (Margin − Discount)
Both figures are percentages of the original selling price. For the example above: 10 ÷ (35 − 10) = 0.4, so 40% more sales.
That one line produces a table worth pinning next to whoever approves discounts:
| Your gross margin | 5% discount | 10% discount | 15% discount | 20% discount | 25% discount |
|---|---|---|---|---|---|
| 20% | +33% | +100% | +300% | not possible | loss on every sale |
| 30% | +20% | +50% | +100% | +200% | +500% |
| 40% | +14% | +33% | +60% | +100% | +167% |
| 50% | +11% | +25% | +43% | +67% | +100% |
| 60% | +9% | +20% | +33% | +50% | +71% |
Read a row from left to right and the pattern is obvious: the thinner your margin, the faster a discount becomes impossible to make up. At a 20% margin, a 20% discount leaves no profit at all, so no amount of extra volume helps.
To get the net price for any discount, the discount calculator gives you the final price and the amount saved. Then compare that saving with your gross profit per sale, not with the price.
The assumptions, stated plainly
The table is a simplification. It holds when:
- Direct costs per unit stay the same. If a larger order gets you a better purchase price, the picture improves.
- Overheads do not change. Rent and salaries are not included. If extra volume forces you to hire, the required increase is higher than the table shows.
- The margin is measured on the list price. If you already work with different prices per customer, use the margin on the price the customer actually pays before the discount.
If you are unsure what your margin actually is, the difference between margin and markup matters here. A "40% markup" is only a 28.6% margin, and using the wrong one in this table gives a very optimistic answer. The article on profit margin vs markup explains the conversion.
Where discounts leak without anyone deciding
In most small businesses, nobody sits down and decides to give away a third of the profit. It happens in small steps.
The habitual discount. A salesperson starts rounding every quote down by 5% because customers expect it. After a year, 5% is the new list price, and the margin in your planning no longer exists.
Stacked discounts. A line discount of 10% on one item, then another 5% on the total "because it is a big order". Stacked discounts multiply rather than add: 10% and then 5% is 14.5% off, and on a 35% margin that means selling 71% more to stand still.
Discounts on the wrong items. A 15% discount on a product with a 60% margin costs a quarter of its profit. The same 15% on a product with a 25% margin costs 60%. When a discount is applied to the total, it hits the low-margin items hardest.
Invisible discounts. A price quietly lowered in the quote, with no discount line. It never shows up in any report, so nobody knows how much was given away in a year.
Early-payment discounts. "2% if paid within 10 days" sounds small. On a 20% margin it is a tenth of the profit on that invoice. It can still be worth it for cash flow, but it should be a decision, not a default.
When a discount does pay off
None of this means discounts are always wrong. They make sense when the numbers behind them hold up:
| Situation | Why it can work |
|---|---|
| Clearing old stock | The money already spent on the stock is gone. Any price above zero turns shelf space back into cash. |
| Volume you will really get | A 10% volume discount on an order that is twice the usual size, from a customer who would otherwise buy elsewhere |
| A new customer with repeat potential | The discount buys the first order. Later orders are at full price. |
| Filling idle capacity | A technician with an empty afternoon costs the same whether booked or not |
| A bundle that raises the order value | Discount on the bundle, not on the item the customer came for |
What all of these have in common: the discount is attached to something the business gets in return, and it ends.
Alternatives that protect the margin
Before cutting the price, it is worth checking whether the customer really wants a lower price or just a better deal:
- Add instead of subtract. Extra setup time, a longer support period or a free accessory costs you the direct cost of that item, not its selling price.
- Tiered prices by quantity. The discount only applies when the larger quantity is actually ordered.
- A time limit. "Valid until the end of the month" makes the discount an event, not the new price.
- Payment terms. Some customers care more about paying later than paying less. Be careful here too: longer terms cost you in cash flow.
- A smaller package. Remove something from the offer instead of lowering the price for the same thing.
A simple discount policy for a small team
Most discount damage can be avoided with a policy that fits on one page:
| Rule | Example |
|---|---|
| Set a ceiling by margin band | Products under 30% margin: max 5%. 30–50%: max 10%. Over 50%: max 15%. |
| Higher discounts need a second person | Anything above the ceiling is approved by the owner |
| Every discount is visible | A separate discount on the quote, never a silently changed price |
| No stacking without approval | One discount per quote: on a line or on the total, not both |
| Discounts have an end date | Written on the quote |
| Review once a month | Total discount given, by salesperson and by product |
The last line is the one that changes behaviour. When the team sees what discounts cost across a month, the habitual 5% tends to disappear on its own.
Seeing what you gave away
The policy only works if discounts are written down in the same place every time. In CRM Business Hub, a discount can be set per line or on the total of a quote or invoice, so it appears as what it is instead of disappearing into a lowered price. The customer sees exactly what they were given, and you can check afterwards what a quarter of "just this once" actually added up to.
Start with the table above, find your own margin row, and decide what each discount has to earn before anyone offers it. CRM Business Hub runs inside your KIMISUITE workspace and is billed per workspace, not per user. Cancel anytime · No minimum term · 14 days free.
