The Discount Everybody Approves
A customer asks for ten per cent off. Someone in sales says it will close the deal. The number sounds small, the deal sounds real, and the discount gets approved before anyone has run the numbers.
Ten per cent feels like a ten per cent problem. It is not.
What the Discount Actually Comes Out Of
Your costs do not move when your price does. The materials, the salaries, the software and the delivery all cost what they cost. So the whole discount lands on your margin.
Take a product that sells at 100 and costs 70 to deliver. You keep 30. Offer ten per cent off and you sell at 90. The cost is still 70. You now keep 20.
A ten per cent price cut has removed a third of your profit on every sale. That is the part that does not show up in the call.
If this is a question your business is sitting with, start with a conversation. No pitch. Just a clear look at the numbers.
Start a conversationSame Discount, Three Businesses
The damage depends entirely on the margin you started with. These figures are illustrative, and they assume your cost per unit stays the same.
If you keep 50 on every 100 sold, a ten per cent discount leaves you with 40. To earn the same gross profit as before, you need to sell a quarter more.
If you keep 30, the discount leaves 20. You need to sell half as much again.
If you keep 20, the discount leaves 10. You need to sell twice as much, just to stand still.
The same discount. A quarter more volume, half more, double. That is the maths hiding behind a request that sounded modest.
Why the Maths Surprises People
People think in percentages of price. The business lives in percentages of margin. A discount of 10 on a price of 100 is a fifth of a margin of 50, a third of a margin of 30 and half of a margin of 20. Few people feel that until it appears in the accounts a month later.
By then the deal has been signed, the customer has been told, and the discount has become the price. Raising it again is an awkward conversation.
Who Approved It
In many businesses, the discount has no clear owner. Sales has the authority to give it. Finance finds out when the margin reports arrive. Each side assumes the other has it covered.
In commercial finance, the first thing you do with a concession is convert it into margin. Not a feeling about the size of the discount, but a number about what it does to what you keep. Once someone has to say that number aloud before approving, some casual discounts may not survive it.
When a Discount Is Still the Right Call
I am not against discounts. Sometimes a customer commits to volume, or pays up front, or signs for three years, and the trade is a good one.
The test I use is simple. A discount for something is a trade. A discount for nothing is a gift. Write down what you are getting in return and how much extra volume the discount needs before it pays for itself. If you cannot do that in a few lines, you are probably giving the margin away.
Before you approve the next one, what does it do to what you keep?
A ten per cent discount is rarely a ten per cent cut to your margin. It is usually a much bigger one.
General information, not accounting or tax advice.
