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: Read more