the true cost of discounting

We all love a discount and we tend to follow the pack and offer discounts to attract new customers but what is this really costing you.​​

Lets start with a break even example:
Sales of $ 1,000,000 (-) COGS $ 650k = Gross Margin of $250k
Fixed expenses of $ 200k + Variable expenses $ 150k = Total expenses of $ 350k
Therefore Net Profit /Loss = $ 0

​Using the same example we now lower prices by 10%:
Sales of $900k (-) COGS $ 650k = Gross Margin of $250k
Fixed expenses of $ 200k + Variable expenses $ 150k = Total expenses of $ 350k
Therefore Net Loss = ($ 100k)

On the surface this makes sense, a 10% discount means a 10% hit to the bottom line. But just what are the additional sales needed for us to recover back to the break even point. It's more than you think!
Sales of $ 1,800,000 (-) COGS $ 1,300,000 = Gross Margin of $500k

​​Fixed expenses of $ 200k + Variable expenses
$ 300k = Total expenses of $ 500k
Therefore Net Profit /Loss = $ 0

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