Why Discounting Rarely Grows Profit
- FutureUP
- 17 hours ago
- 2 min read
Price cuts are easy to implement and welcomed by customers, but rarely deliver the results we expect.
In a previous post, we examined why price cuts typically fail to generate the required revenue growth. Now, let’s extend the same logic to profit — and here’s where things become even more challenging.
When it comes to profit, one additional parameter changes the entire story:
👉 Your current margin.
How Margin Shapes profit growth when discounting
A single formula links margin and profit, price, and volume changes:
pr = p/m + q + q*p/m
(pr,p,q: % change of profit, price, quantity - m: % margin)You can use this formula to estimate how much volume uplift you need to maintain profit after a discount, or to target a desired profit increase.
In most real-world settings, the results are much more difficult than they appear on the surface.
💡 Key Insights
1️⃣ Profit behaves like revenue — but margin magnifies everything
The lower your margin, the more sensitive profit becomes to discounting.
2️⃣ It’s the relative price cut that matters
10% is tiny when the margin is 70%.
10% is catastrophic when the margin is 12%.
3️⃣ If the price cut exceeds the margin, profit will shrink
No matter the quantity increase, there is no feasible path back to break-even.
This is the grey "impossible" region in the second chart.
4️⃣ As price cuts approach the margin, the required quantity increase explodes
As the first chart shows, once the discount-to-margin ratio approaches 20%, the quantity needed to keep profit flat becomes challenging and rises exponentially from there.
If price cuts are your primary growth lever, think twice about whether they’ll truly deliver the profit you expect. 🎯
Interested in learning more about AI-Powered Price Optimization and Strategic Forecasting?
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