Discounts feel like the easiest way to win customers. A board outside saying “10% OFF” pulls people in, regulars smile, and the till rings a little faster. But here is the maths most shops never do: on an item with a 20% margin, a 10% discount does not cost you 10% of your profit. It costs you half of it.
Work it out. You buy at Rs 80, sell at Rs 100 — Rs 20 profit, 20% margin. Give 10% off and the price becomes Rs 90. Your cost is still Rs 80. Profit: Rs 10. You gave away 10% of the price and lost 50% of the profit. Give 15% off and you are down to Rs 5 profit — a 75% haircut. Discounts are priced in percentages of the sale, but they are paid for in percentages of your profit, and the exchange rate is brutal.
Know the maths before you print the banner
Before any discount, answer two questions. First: what is the true margin on this item (profit ÷ selling price — not markup)? Second: how much extra volume do I need to earn the same total profit? The formula is unforgiving: at a 20% margin, a 10% discount means you must sell twice as many units just to stand still. Will the discount really double your sales of that item? Sometimes yes — for genuinely price-sensitive, high-competition goods. Often, honestly, no.
When discounts actually make sense
- Clearing slow or near-expiry stock: a discounted sale beats a total write-off. This is the best use of discounts.
- Driving footfall with a loss leader: discount one visible item to bring people in, and earn margin on everything else they buy. Works only if the basket grows.
- Rewarding regulars: a small, targeted thank-you to loyal customers builds the relationship that keeps them from the competitor.
- Matching a genuine competitor threat: sometimes you discount defensively. Do it deliberately, temporarily, and on as few items as possible.
Smarter than a flat discount
Flat percentage discounts are the laziest promotion and the most expensive. Consider alternatives that protect margin better: bundle deals (“buy the cooking oil, get the masala at a special price”) move two items and hide the effective discount; quantity breaks (“buy 2, save Rs 30”) reward bigger baskets; a simple loyalty habit — every tenth visit gets a small freebie — costs far less than a permanent 5% off and builds stronger loyalty. And never discount your fastest movers: they sell anyway, so a discount on them is pure given-away profit.
Watch the creep, too. The “special price for you, bhai” given at the counter, the staff discount that quietly extends to friends, the festival discount that never ends — unrecorded, unmeasured discounts are the most dangerous kind because nobody sees the total. If you give discounts, record them. What gets measured gets managed; what stays invisible just leaks.
Three rules for sane discounting
- Set a discount budget: decide in advance the maximum you will give away this month, and track it like any other expense.
- Put an end date on every promotion. A discount without an end date becomes the new price — and customers will fight you when you try to raise it back.
- Discount slow stock and bundle deals, never your best sellers at full margin. Protect what earns.