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Cost & pricing
Discounting and margin
A discount comes straight off the margin, not the revenue: a 10% discount on a 30%-margin sale gives away a third of the profit, and needs about 50% more volume just to break even.
Owned by: AnalystTest band: Analyst
The formula
Volume needed to hold profit = Old margin % ÷ (Old margin % − Discount %) − 1
In practice
Put the break-even volume for any discount in front of whoever approves it. Most discounts fail that test.
The kind of thing the test asks
- A product has a 30% margin. Sales wants to offer a 10% discount. Roughly how much more volume is needed to make the same profit?
- A rep offers a 20% discount on a product with a 50% margin. To hold profit, volume must rise by…