Pricing
A 20% discount can require 67% more sales
By Prof. Alessandro Buffoli, PhD
Before approving the promotion, calculate how many extra units have to leave the shelf just to preserve contribution.
A 20% discount sounds manageable until you calculate what happens to the money left from each sale.
Take a hypothetical product selling for HK$100 with HK$50 in variable cost per unit. Each full-price sale contributes HK$50 towards fixed costs and profit. Discount it to HK$80 and that contribution falls to HK$30. The selling price fell by 20%; contribution per unit fell by 40%.
To preserve the HK$5,000 contribution from 100 full-price sales, the business now needs about 167 discounted sales. That is approximately 67% more volume. The calculation assumes unchanged unit costs and fixed costs, and no other effect of the promotion.
That last sentence matters. Extra delivery work, overtime, advertising or returns can push the required volume higher. Selling out the available stock before reaching the target makes the arithmetic worse still.
What exactly is the discount supposed to buy?
I would separate three cases. Clearing stock that is unlikely to sell later is one decision. Acquiring a new customer who may return is another. Giving existing customers a reduction on something they were already planning to buy is a third.
The same discount percentage can look sensible in one case and expensive in another. For clearance, the comparison may be with a much lower recovery value. For acquisition, the business needs evidence about later purchases and their contribution. For regular customers, it needs to consider how much full-price demand the offer replaces.
A report that says “sales rose 40%” is therefore insufficient. In the example above, 140 discounted units generate HK$4,200 of contribution. The team sold substantially more and still has HK$800 less towards its fixed costs than before.
That does not automatically make the promotion a mistake. It means someone must explain what the missing HK$800 purchased and how the business will know whether that objective was achieved.
Watch the week after the promotion
Some of the apparent extra demand may be purchases brought forward. A customer who buys three packs today may need none next week. I would compare a period long enough to capture that substitution, rather than stopping the report when the promotional sales look strongest.
For a new campaign, write down the contribution hurdle, the intended customer and the reason for expecting additional demand before it starts. Then compare the result with a credible estimate of what would have happened without it.
Discounting is easy to propose because its cost is visible on a small label while its required volume sits in a separate calculation. Put the two together. In this example, the label should make the team think “167 units”, not merely “20% off”.
Prof. Alessandro Buffoli, PhD
Assistant Professor of Marketing at The Hang Seng University of Hong Kong.