A discount feels like a small concession. Ten per cent to get the job over the line. It is not small, and the reason owners give it away so casually is that very few have ever done the arithmetic.
Here is the arithmetic. A discount does not come out of your price, it comes out of your gross profit, and your gross profit is a fraction of your price. Take ten per cent off a job running at a forty per cent margin and you have not lost a tenth of anything. You have lost a quarter of the money you were going to keep. Which raises the only question that matters: how much more work do you now have to do to end up where you started?
The formula, and its mirror
Extra volume needed equals the discount divided by your gross margin minus the discount. Run that at four common margins after a ten per cent discount:
- At a 50 per cent gross margin, you need 25 per cent more volume.
- At 40 per cent, you need a third more.
- At 30 per cent, you need half as much again.
- At 20 per cent, you have to double the business.
The lower your margin, the more violent the arithmetic. The mirror calculation is more cheerful and far less used. Volume you can afford to lose after a price increase equals the increase divided by your margin plus the increase. At a 40 per cent margin, put prices up ten per cent and you can lose a fifth of your volume and still make the same gross profit. A fifth, gone, and you are no worse off — doing less work, with more capacity.
Sit with that pair for a minute. Discounting means more work for the same money. Raising prices means less work for the same money. Owners spend far more time considering the first than the second.
Why it matters to an owner
Because the extra volume is not free. It is more delivery, more staff time, more scheduling, more invoices, more chasing, more capacity, more risk and more of your attention. The formula assumes your costs scale perfectly and your overheads do not move, and neither of those is true. In real life you need more than the theoretical extra volume simply to stand still.
And because discounts are sticky. Nobody has ever rung a client to say the introductory rate ends this month. Discounts become the price, quietly and permanently, and they spread by word of mouth to every other client who finds out.
Putting numbers on it
Illustrative arithmetic, not a claim about any business. Take a business turning over £800,000 at a 40 per cent gross margin. Gross profit £320,000, overheads £260,000, net profit £60,000.
Discount ten per cent across the board. Volume holds, so revenue is £720,000. The cost of delivering it has not changed: still £480,000. Gross profit falls to £240,000 against overheads of £260,000. The business has gone from £60,000 of profit to a £20,000 loss, and nobody has done a single thing differently. To get back to £320,000 of gross profit at the discounted price, turnover has to reach roughly £960,000 — a third more work, £160,000 more invoiced, for exactly the money it earned before.
Now go the other way. Same business, prices up ten per cent, and assume nobody leaves. Revenue £880,000, cost of sales unchanged at £480,000, gross profit £400,000, overheads £260,000. Net profit £140,000. The profit has more than doubled on a price move most clients would not comment on. And if some did leave, you could lose a fifth of the business and still be level on gross profit while doing a fifth less work.
How to use it
Find your actual gross margin
Not the one you assume. Revenue minus the cost of delivering it, as a percentage. If you cannot get this out of your accounts in ten minutes, that is the first job, because every pricing decision you make is currently a guess.
Write the discount table for your own margin
Five per cent, ten and fifteen, with the volume each one demands. Put it on one card and keep it where you quote from.
Add up last year's discounts in pounds
That total is profit, because none of it had a cost attached. Owners routinely find a number that would have paid for the hire they said they could not afford.
Kill the standing discounts
List every client on a rate that was once temporary. Decide which ones are ending and when, and put the dates in the diary this week.
Build three ways to say no
A smaller scope at a lower price. The same price with better terms for you, such as payment up front. The same price with something added that costs you little and is worth a lot to them. Never the same thing, cheaper.
Model a five per cent increase across the book
Work out the profit it adds and how many clients you could lose before you were worse off. Then decide whether the conversation is really as frightening as the number suggests.
When a discount is the right call
There are three, and they share one feature: you get something back.
Payment terms
Two or three per cent for payment in advance is not weakness, it is arithmetic. If the alternative is waiting sixty days and funding the gap on an overdraft, the discount can be cheaper than the finance, and it removes the collection risk entirely.
Committed volume
Not hoped-for volume. Committed, in writing, with a minimum. The mistake is granting the volume price for the volume promise, then discovering the promise was optimism and the price is now permanent.
A deliberate entry price
A lower rate to get inside an account you have a specific plan for, with a written end date, an agreed reason, and both sides knowing what the standard price is. That is an investment with a term. A vague introductory rate with no end date is your new price list.
Questions to ask yourself
- Out of ten, how well do you know your gross margin without opening anything?
- What did discounting cost you last year in pounds, and where would that money have gone?
- Which client is on a price you would never quote today, and what stops you having the conversation?
- When did you last put prices up, and what did you actually lose when you did?
- Is the discount you are about to give a commercial decision, or an escape from a conversation about value?
Never concede, always exchange. And give every discount a name and an expiry date, or it becomes the price by default.
Price is the fastest lever in Business Coaching, because it is the only one with no delivery cost attached: every pound of it is profit, and every pound given away is profit given away. Read it with The Cash Conversion Cycle, which is the other lever that costs nothing to pull, and Feel, Felt, Found, which is the structure for handling the price objection rather than folding to it.
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Frequently asked questions
How much extra work does a 10 per cent discount actually need?
The formula is the discount divided by your gross margin minus the discount. At a 50 per cent gross margin, a 10 per cent discount needs 25 per cent more volume to make the same gross profit. At 40 per cent it needs a third more. At 30 per cent it needs half as much again. At 20 per cent you have to double the business. The lower your margin, the more violent the arithmetic becomes. And the calculation is generous, because it assumes your delivery costs scale perfectly and your overheads do not move, which is rarely true. In practice you need more than the theoretical figure just to stand still.
What is the mirror calculation for a price increase?
Volume you can afford to lose equals the increase divided by your gross margin plus the increase. At a 40 per cent margin, put prices up 10 per cent and you can lose a fifth of your volume and still make the same gross profit, while doing a fifth less work with more capacity free. Sit with that pair for a moment, because it is the whole argument. Discounting means more work for the same money. Raising prices means less work for the same money. Owners spend far more time considering the first than the second, and the clients who leave over 10 per cent are rarely the ones you would have chosen to keep.
Is a discount ever the right call?
Three occasions, and they share one feature: you get something back. Payment terms, where a small percentage for payment in advance can be cheaper than funding the gap on an overdraft and removes the collection risk entirely. Committed volume, in writing and with a minimum, rather than hoped-for volume that turns out to be optimism while the price becomes permanent. And a deliberate entry price into a named account, with a written end date, an agreed reason and both sides knowing the standard price. The principle in all three is the same: never concede, always exchange, and give every discount a name and an expiry.