A discount comes entirely out of your profit, because ingredients, packaging and energy cost the same however little you charge. That is why a 20% discount can wipe out a third or more of what you make per unit, and why making up for it takes far more than 20% extra sales. The sum is: units needed = current units × current contribution ÷ discounted contribution.
Why a discount comes out of your profit
Your price has two parts: what it costs to make one more unit, and what you keep. The first is your variable cost: ingredients, packaging, labels, the energy for the batch and any per-sale fees. What you keep is your contribution margin, and it pays your rent, your time and your profit.
When you drop the price, the variable cost does not notice. If you sell something for $8.00 that costs you $2.80, you keep $5.20. With 25% off you charge $6.00 and keep $3.20. The price fell 25%, but what you keep fell 38%.
The formula: how many more you need to sell
To make the same money with the discount as without it:
units needed = current units × current contribution ÷ discounted contribution
As a percentage, with your contribution margin (m) and the discount (d) both as fractions of the price:
increase needed = m ÷ (m − d) − 1
| Your contribution margin | 10% off | 20% off | 30% off |
|---|---|---|---|
| 40% | +33% | +100% | +300% |
| 50% | +25% | +67% | +150% |
| 60% | +20% | +50% | +100% |
Read the top row. On a 40% contribution margin, 20% off means doubling your sales just to stand still. And if the discount equals your margin, every sale leaves you nothing: no volume can make up for it.
One more thing: extra units are also extra kitchen hours. Selling twice as much to earn the same means working twice as hard for the same money.
Worked example: sourdough at 25% off
You sell sourdough loaves for $8.00. Your variable cost per loaf (flour, salt, starter, bag and oven energy) is $2.80. You sell 60 loaves a week. All prices are before any sales tax.
Without the discount
- Contribution per loaf: 8.00 − 2.80 = $5.20 (65% of the price)
- Weekly contribution: 5.20 × 60 = $312
With 25% off
- Price: 8.00 × 0.75 = $6.00
- Contribution per loaf: 6.00 − 2.80 = $3.20
- Loaves needed to stay at $312: 312 ÷ 3.20 = 97.5, so 98 loaves
- Increase: 98 − 60 = 38 more loaves, about 63% more
Check with the formula: 0.65 ÷ (0.65 − 0.25) − 1 = 0.625, or 62.5%. If the promotion lifts you to 80 loaves, which feels like a success, your contribution is 80 × 3.20 = $256: $56 less than without the promotion, and you baked 20 more loaves.
A "3 for 2" deal
Another week you try three loaves for the price of two: $16.00.
- Contribution on three loaves with the deal: 16.00 − (2.80 × 3) = 16.00 − 8.40 = $7.60
- Contribution on three loaves at full price: 5.20 × 3 = $15.60
It depends on who takes it:
- If someone who would have bought one loaf takes the deal, you go from $5.20 to $7.60: $2.40 more.
- If someone who would have bought three anyway takes it, you go from $15.60 to $7.60: $8.00 less.
You need more than three customers of the first kind for every one of the second (8.00 ÷ 2.40 = 3.3) just to break even on the deal. If your regulars already buy several loaves for the freezer, this deal costs you money.
If you priced with a markup
Say you reached $8.00 with cost-plus pricing: a loaded cost of $5.00 (ingredients, packaging, your time, energy and waste) plus a 60% markup. Your profit over loaded cost was 8.00 − 5.00 = $3.00. At 25% off it is 6.00 − 5.00 = $1.00. The price fell 25%; your profit fell by two thirds.
Discounts that do not look like discounts
- Free delivery. If a delivery costs you $4 and a typical order is two loaves (contribution 5.20 × 2 = $10.40), free delivery leaves you $6.40 an order. To stand still you need 10.40 ÷ 6.40 = 1.625 times the orders: 62.5% more.
- Loyalty cards. "Tenth loaf free" means charging for 9 and handing over 10: $72 for ten loaves with $28 of variable cost. Contribution of $44 instead of $52, so $0.80 less per loaf, a 10% discount. It can be worth it if the card brings customers back more often.
- Special prices for big orders. That is a volume discount; run the same sum before you offer it.
- Samples and tastings. That is free product, with its own budget logic; the guide on the cost of samples, tastings and giveaways covers it.
When a discount does make sense
- Stock that will go to waste. If today's loaves will not sell tomorrow, the variable cost is already spent. Any price that covers the little that remains (a bag, the trip) beats the bin.
- Idle capacity. If you have free oven hours and your fixed costs are already paid, selling cheaper in those hours can add money, as long as contribution stays positive and it does not replace full-price sales.
- A first purchase. A discount to get someone to try you, with a limit on units and an end date. Without a limit, it becomes your new price.
A discount with no end date is no longer a promotion. If you find you always need one to sell, the problem is the price or the product, and the guide on how to price a food product helps you go back over it from the start. You can also present the price better with well-built bundles and sizes instead of cutting it.
Do it with the calculator
Put your product into the food cost calculator to get its cost per unit; with that number and your price, work out the contribution with and without the discount, and how many more units you need before launching the promotion.
Frequently asked questions
How much more do I need to sell to cover a 20% discount?
It depends on your contribution margin. If you keep 60% of the price, you need 50% more sales to stand still; if you keep 40%, you need to double them. The formula is units needed = current units × current contribution ÷ discounted contribution.
Should I work out a discount on the price with or without sales tax?
Without. Customers see the final price, but what you keep comes from the price before tax. Run the discount on the pre-tax price to see what is really left.
Is buy one get one free a 50% discount?
Across the two units, yes: you charge for one and hand over two. Because each unit still has its own variable cost, it can leave you with a loss on low-margin products.
When does a discount make sense?
When you have stock that will be wasted if it does not sell, when you have idle capacity you are paying for anyway, or to get someone to try you for the first time with a clear limit on units and dates.