# 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’):

• 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!

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