Why Discounts Rarely Create Profit
The math behind discounting is brutal. Here is why most promotions destroy more value than they create.
Discounting feels like a lever you can pull whenever you need more revenue. Sales slowing down? Run a promotion. Need to hit a target? Offer 20% off. It works, in the sense that orders come in.
But the math is brutal. Most discounts destroy more value than they create.
The Margin Math
Assume you have 40% gross margin on a $100 product. Your gross profit is $40.
Now offer 20% off. The product sells for $80. Your cost is still $60. Your gross profit is now $20.
To generate the same gross profit dollars, you need to sell twice as many units. Does your promotion double your volume? Almost never.
The Hidden Costs
The margin math is just the start. Discounts also pull forward demand. Some of those customers would have bought anyway, at full price, next week. You just paid to accelerate a sale that was already coming.
Discounts train customers to wait. If you run promotions regularly, savvy customers learn the pattern. They hold off on purchases until the next sale. Your full-price conversion rate declines.
Discounts attract discount-seekers. The customers who respond most strongly to promotions are often the least valuable long-term. They came for the deal, not for your brand.
When Discounting Makes Sense
Discounting is a tool, not a strategy. There are legitimate uses: clearing seasonal inventory, testing price sensitivity, acquiring customers with high lifetime value.
The key is intentionality. Why are you discounting? What is the expected return? How will you measure whether it worked?
Random, reactive discounting almost never pays off. Strategic, measured discounting can be valuable.
Alternatives to Discounting
If you need to stimulate demand, consider alternatives. Add value instead of cutting price. Offer a gift with purchase. Create a bundle that increases perceived value. This is what smart AOV optimization looks like.
If you need to move inventory, consider markdowns rather than promotions. A permanent price reduction is more honest and does not train customers to wait for sales.
If you need to hit a revenue target, question whether discounting is actually the fastest path. Often, focusing on conversion or retention produces better results.