Customer discounts that do not lose money: build them from product profit

Customer discounts have a way of turning a good week into a bad month. Tarmeh made a 20 percent holiday code; sales doubled, and at the weekend profit was lower than a normal week, because the percentage had been picked by feel. The formula here is one line: build every discount from the product's profit, not from its price.

A 20 percent discount off the price is half your profit

The common error: 20 percent off means 20 percent less profit. It does not. The discount comes off the selling price while cost of goods, packaging, shipping and the gateway fee stay put, so the whole 20 percent comes out of profit.

At a 35 percent margin, a 20 percent discount removes more than half of it. If you have not worked out your margins yet, read online shop profit first; this article builds on that example.

A full worked example: one coat, five discounts

Back to the shop's cream coat, with the same made-up figures: selling price 450 thousand, cost 250 thousand, packaging 15 thousand, shipping 20 thousand and a gateway fee of roughly 5 thousand. Costs add up to 290 thousand, so profit per unit at full price is 160 thousand. Now sell it with five different discounts:

Profit does not fall in a straight line: 10 percent takes a slice, 20 takes more than half, 30 takes nearly all of it. Somewhere near 35 percent it hits zero, and every sale past that is a loss.

How much extra volume does a discount have to bring?

At 20 percent off, profit per unit drops from 160 thousand to 70 thousand, so keeping the week's profit level means selling more than twice as many. A story that exactly doubled sales is still behind.

Customer discounts without loss: where each product's ceiling comes from

The rule is one line: a product's discount ceiling is its margin. A coat with a 35 percent margin can take 35 percent off and land at zero; a bag with a 15 percent margin is in the red at the same 20 percent. One store-wide code is the most dangerous kind: a flat percentage pushes some products below zero unnoticed.

• An easy red line: never discount more than half the margin, about 17 percent here.
• Leave low-margin products out, or give them a small fixed amount instead.
• Selling below profit to clear idle stock is fine when deliberate; call it clearance, not a campaign.

Seeing profit per product separately is what online shop accounting calls a clean sales record: every order stored with its cost price, discount and fee.

Which customer gets which discount

One percentage for everyone is the second expensive mistake. Sara, who buys every month, would have paid full price; the customer silent for three months will not return without a reason. Online shop customer club splits customers into VIP, at-risk and new; here is what each can take.

• VIP: early access, not a discount. If you send a code, keep it small and call it thanks.
• At-risk: the highest return. A time-limited code, once per person, under the product's red line.
• New: a code for the second order, not the first.
• Everyone: seasonal discounts only on products whose margin can carry them, never the whole catalogue.

Building a discount code from profit, step by step

Each setting on a dedicated code closes a leak. The order matters: the number first, then the conditions, then who receives it.

1. 1Record the cost price of every variant; nothing else works without it.
2. 2Read each campaign product's margin from the per-product profit report.
3. 3Set the percentage under half of the lowest margin on the list, or drop that product.
4. 4Choose a percentage or a fixed amount; a fixed amount is weak on expensive items and dangerous on cheap ones.
5. 5Set a minimum order amount so a tiny basket cannot use it.
6. 6Turn on an expiry date, a redemption cap and once per customer.
7. 7Send the code only to the group you built it for.

A code with no expiry circulates in DMs for months after the margin has changed, and while it is live every price quoted in a DM has to be the discounted one; a wrong price in a DM shows what happens when it is not.

Instead of a percentage: three discounts that cost you less

A percentage is the most expensive shape of discount: it comes straight off the price and customers get used to it fast. Three alternatives feel as good and cost less:

• Free shipping: 20 thousand in our example, under 5 percent of the price, yet it feels like a big discount because shipping reads as an extra.
• A discount on the second item: 15 percent on the second coat instead of 20 on one; profit per unit dips, profit per order rises.
• A small gift: a low-cost, high-margin item in the parcel; it costs you the purchase price and reads as the selling price.

After the campaign: look at profit, not sales

Judged on sales alone, Tarmeh's campaign was a success. Look at three numbers instead: how many used the code and how many would have bought anyway; that product's profit in the campaign week against a normal week; and average order value, which falls when a discount shrinks baskets. The full weekly list is in online shop sales report.

In ProMall, each product's profit comes from the cost price recorded on its variant, and a code carries an expiry date, a redemption cap, once per customer and its own redemption count. What percentage, and for whom, is still your call; it just stops being a guess.

Where to start tomorrow morning

1. 1Pick your best-selling product and write down its cost price, packaging, shipping and gateway fee.
2. 2Work out its margin; half of it is your discount red line.
3. 3Compare your last code against that line; if it is higher, give it an expiry date today.

That one comparison usually explains why a month full of sales left nothing behind.