How Discounts Can Destroy Your Profit Margin

Discounts feel like a small generosity to the customer. On thin margins, they can quietly remove most of your profit.

The problem

A discount comes straight off the price, but your costs stay the same. On a low-margin product, even a modest discount can take a large share of profit — or all of it.

A small business example

A product sells for $100 with a cost of $80, so the profit per unit is $20 (20% margin).

Offer a 10% discount: price drops to $90, cost stays $80, profit per unit becomes $10. You just lost half your profit.

Offer 20% off: price is $80, profit is $0. You're selling at cost.

What the numbers mean

A 10% discount on a 20% margin removes 50% of profit. A 20% discount removes it all.

Practical interpretation

Discounts must be measured against margin, not against price. Always ask: how many extra units must I sell to make up the lost profit?

Action points

Calculate the profit impact of every promotion before launching it.
Set a maximum discount % linked to your product's margin.
Prefer added value (bundles, service) over price cuts when margins are tight.
Track post-promotion profit, not just post-promotion sales volume.

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