In plain words
A percentage discount lowers the price by a set share: 10% off, 20% off. It is the simplest offer to run and the easiest for a customer to understand.
It is also the most expensive per point. The whole discount comes out of revenue, and the product, the pick and the label cost what they did before. Only the costs that are a share of revenue shrink a little. So the margin falls by nearly the full dollar value of the discount.
Formula
- Discounted price = price × (1 − discount)
- Margin lost ≈ price × discount × (1 − costs charged as a share of revenue)
Worked example
At 20% off, the $40.00 bag sells for $32.00. The engine puts its margin at $7.99, down from $15.36: the margin rate falls from 38.4% to 25.0%.
A fifth off the price took about half the margin. The discounted bag needs 92.2% more buyers to earn what the full-price bag earns per visitor.
The example order
A $40.00 bag of coffee, shipped free, every cost counted
2 declared kinds cost nothing on this option
| Step | Grain | Amount |
|---|---|---|
| Revenue | – | $40.00 |
| Cost of goods | per unit | −$12.00 |
| Pick and pack | per order | −$1.18 |
| Packaging | per parcel | −$0.50 |
| Shipping label | per parcel | −$7.50 |
| Card fee per order | per order | −$0.30 |
| Refunds | percent | −$2.00 |
| Card processing | percent | −$1.16 |
| Contribution margin | – | $15.36 |
| 2 kinds costing nothing | – | $0.00 |
Computed by the margin engine in Offer Suite's own code, in whole cents, from a $40.00 bag of coffee with a $12.00 unit cost.
A 20% discount does not cost 20% of the profit
It costs 20% of the price, and profit is only a part of the price. If the order keeps 38% of its revenue, a 20% discount removes roughly half of what it keeps. The thinner the margin, the larger the share a given discount takes.
Using it
Before choosing a discount, work out the lift it needs to break even. Then ask whether a change of that kind has ever produced that lift for you. Often a smaller discount, a bundle or a gift on a larger order reaches the same customer for less margin.