The Dangers of Discounting.

A discount feels like a small concession. Ten per cent gets the job over the line. The arithmetic shows how large it is.

A discount comes out of your gross profit, which is a fraction of your price. Take ten per cent off a job running at a forty per cent margin and you have lost a quarter of the money you were going to keep. The question is: 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 covers a price increase. 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.

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 practice you need more than the theoretical extra volume to stand still.

Discounts also stick. 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. 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

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.

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.

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 can pay for itself. 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

The volume must be 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.

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 lose when you did?
• Is the discount you are about to give a commercial decision, or an escape from a conversation about value?

Price is the fastest lever in Business Coaching, because it is the only one with no delivery cost attached. 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.