The Discount That Eats More Than Ten Percent of Your Profit
A small price cut can take a much larger bite from the margin. Run the arithmetic before announcing the sale.
Here is a fictional product priced at R100, with R70 in variable costs. Each sale leaves R30 toward fixed costs and profit. A ten-percent discount lowers the price to R90, leaving R20.
The lost margin is the surprise
The price fell by ten percent, but the contribution fell by one-third. In this simplified example, selling fifteen discounted units produces the same R300 contribution as selling ten at the original price. That is fifty percent more units, before considering additional work or other changes.
Editorial image from Blogdel's business collection, used for illustration.
SBA break-even material explains the relationship between selling price, variable costs and fixed costs. Apply that structure to your own numbers rather than copying this example as a pricing recommendation.
Give the promotion a purpose
Ask what the discount is meant to achieve: clear old stock, introduce a product or encourage a larger order. Then estimate whether the expected extra sales compensate for the lower contribution and any extra fulfilment costs.
A promotion can make sense. The risky part is celebrating revenue while ignoring what each sale leaves behind. Before printing the cheerful sale banner, calculate the additional units needed and whether your operation can actually sell and deliver them.
Editorial image from Blogdel's business collection, used for illustration.
Sources and further reading
References
- Break-even point | US Small Business Administration · primary