A 10% discount cut my gross profit in half. Where did the money go?

A customer asks, “Can you do 900?” The pack on your shelf is priced at 1,000. You paid 800 for it. Saying yes still leaves you with a profit, so the discount feels modest.

Now look at the same decision from your side of the counter. The customer saves 100. You give up 100 of the 200 gross profit you would have earned on that pack. That is how a 10% discount cuts your gross profit per pack in half.

Where the money went

Use any currency you normally trade in. The arithmetic is the same, provided the cost and selling price are for the same pack and use the same tax basis.

• At full price: You sell for 1,000. Subtract the pack’s cost of 800, and your gross profit is 200.
• At 10% off: You sell for 900. Subtract the same cost of 800, and your gross profit is 100.

The two percentages have different starting points. The customer’s 10% discount is calculated on the 1,000 selling price. Your 50% reduction in gross profit is calculated on the 200 you originally stood to earn. Your supplier still gets 800 either way.

If you track gross margin as a percentage of sales, it also changes: from 20% at full price (200 ÷ 1,000) to 11.1% after the discount (100 ÷ 900). What halved was the amount of gross profit per pack. That is the money available to help cover wages, rent and other operating costs.

How many extra packs must you sell?

Suppose you usually sell 10 packs a week at full price. At 200 gross profit each, those sales earn 2,000 in gross profit. If you discount every pack and earn 100 on each, you must sell 20 packs to earn the same 2,000. That means 10 extra packs, assuming the purchase cost stays at 800.

Here is how a sales report can make a weak promotion look successful. Suppose you discount all the packs and sales climb from 10 to 15 packs that week:

• Before the promotion: 10 packs × 1,000 = 10,000 revenue, earning 2,000 gross profit.
• During the promotion: 15 packs × 900 = 13,500 revenue, earning 1,500 gross profit.

Revenue rose by 35%, yet the pharmacy earned 500 less in gross profit. If you review only sales revenue or packs sold, you could easily approve the same promotion again.

A one-off discount changes the decision

Consider two different offers. If your usual 10 customers still pay full price and an additional customer buys one discounted pack, you earn 2,100 in total gross profit: 2,000 from the usual sales plus 100 from the extra sale.

If you offer 10% off to everyone and sell those same 11 packs, you earn 1,100. Same number of packs sold, but a 1,000 difference in gross profit. The question for the owner is: How many sales will this offer bring in, and how many customers who would have paid full price will also receive it?

A two-minute check before approving a discount

Pick one frequently discounted item from your till report. Use its actual purchase cost and the price customers paid. Then work through these three lines:

1. Gross profit at full price = usual selling price − unit cost.
2. Gross profit after discount = discounted selling price − unit cost.
3. Units needed to preserve gross profit = usual units sold × full-price gross profit per unit ÷ discounted gross profit per unit. Round up to a whole unit.

If the discounted gross profit is zero or negative, extra sales at that price cannot restore the original positive gross profit.

Last week, you sold 10 packs and earned 2,000 in gross profit. If you give every buyer the 10% discount this week, you’ll need to sell 20 packs just to earn that same 2,000. Before approving the offer, ask: “Will this lower price bring in 10 extra pack sales?” When the offer ends, check how many packs actually sold and how much gross profit they earned.