The Real Impact of Giving Discounts
As a consumer, we all love to receive discounts when we purchase. The same goes when buying goods or services for our company.
But discounts have a strong impact on the business and its Gross Profit (also called ‘Gross Margin’):
- Discounts received trigger:
- Increase in Gross Profit
- Increase in Profit before Tax
- Discounts given can trigger:
- Loss or Revenue
- Loss of Gross Profit
- Decrease of Profit before Tax
So if you intend to give a discount to your customers, the question becomes: How much increase in Revenue do I need, in order to maintain the Gross Profit in $ value?
The answer is in the following formula:
= [(Gross Profit ratio / (Gross Profit ratio – % Discount given)) – 1] x 100
If it sounds complicated, here is a table with all calculations already done:
Current Gross Profit Margin (%) | |||||||||
30% | 40% | 50% | 60% | 70% | 80% | 90% | 100% | ||
Discount Given | 5% | 20% | 14% | 11% | 9% | 8% | 7% | 6% | 5% |
10% | 50% | 33% | 25% | 20% | 17% | 14% | 13% | 11% | |
15% | 100% | 60% | 43% | 33% | 27% | 23% | 20% | 18% | |
20% | 200% | 100% | 67% | 50% | 40% | 33% | 29% | 25% | |
25% | 500% | 167% | 100% | 71% | 56% | 45% | 38% | 33% | |
30% | 300% | 150% | 100% | 75% | 60% | 50% | 43% | ||
35% | 700% | 233% | 140% | 100% | 78% | 64% | 54% | ||
40% | 400% | 200% | 133% | 100% | 80% | 67% | |||
45% | 900% | 300% | 180% | 129% | 100% | 82% | |||
50% | 500% | 250% | 167% | 125% | 100% |
If you have a 40% Gross Profit and give a 15% Discount, you will need a 60% increase in Revenues to maintain the same $ Value of Gross Profit. Any increase in Revenue below 40% will result in a lower Gross Profit and a lower Profit before Tax.
If you have an 80% Gross Profit and give a 40% Discount, you will need a 100% increase in Revenues to maintain the same $ Value of Gross Profit!