Dec 17, 2013

What impact does discounting your products have on your profits? If you want to maintain the same amount of gross profit, how much more do you have to sell if you discount your products or services? Many business owners believe that if they discount their products or services, they will attract more customers and make more profit. This is not always the case. How many more items do you have to sell if you give a 5% discount on your products to your customers? Believe it or not, but you would have to sell over 60% more items to make the same amount of profit as before the discount. By using the formula below, you can easily calculate how much more you’d have to sell with a given discount.

Dollar Discount Amount / New Gross Profit Amount per unit * 100%

Note that when you discount a product, the cost of goods sold (COGS) does not change. Let's use the sample data below and apply this formula.

	Without discount	With 2% discount
Sales revenue ($/unit)	$200	$200 - $4 = $196
COGS ($/unit)	$176	$176
Gross profit ($/unit)	$24	$20
# of units sold	200	200
Total gross profit	$4800	$4000

In this example, if a 2% discount is used, there would be a shortfall of $800. By applying the above formula (where the dollar discount amount is $4 and the new gross profit per unit is $20), the business needs to sell 20% more items to reach the same gross profit. What does this mean for a business? To make the same profit before a discount (i.e. $4800), you’d have to sell more. In this case, the new volume of sales would amount to:

($200*20%) + 200 = 240 units

You can cross check that this new volume of sales is correct by multiplying 240 units by $20/unit. You’ll get $4800 which is the original gross profit before the discount. So you can see that if you were to apply a discount to your products or services, you'd have to invest more time and effort to selling more units to ensure you reach the same gross profit before the discount. Rather than discounting, offering your clients quality products or services is an ideal way of going about your business. Customers are generally willing to pay the extra bit given good quality products and services. If you're interested in learning more about business analysis, I would recommend New Horizons' Professional Development training program Financial Acumen for Business Professionals. This course is an accelerated learning experience that will help employees, particularly those from a non-financial background, understand how financial data is generated and reported, and how it can be used for improved decision making and analysis.