How much must you sell to justify a discount?
Say a packet of namkeen sells for Rs 100 and costs you Rs 80. You earn Rs 20 on it. Put 10 percent off and you earn Rs 10. To finish the week with the same profit from that packet, you now have to sell two for every one you used to sell.
That's the whole problem with a percentage discount. It looks small on the sign and it's huge at the till. Here's the formula, and what I'd do instead this Diwali.
The formula
Extra volume you need = discount ÷ (margin − discount)
Margin here is your gross margin: the share of the selling price you keep after paying for the product. Discount is the share of the price you give away. Both are percentages of the selling price.
Check it against the namkeen. Margin is 20 percent and the discount is 10 percent. So 10 ÷ (20 − 10) = 1, which means 100 percent more units. Two packets for every one.
Two tables to keep
| Discount | Extra units you need to sell |
|---|---|
| 5% | 33% more |
| 10% | 100% more |
| 15% | 300% more |
| 20% | No amount of extra volume covers it. You earn nothing per unit. |
| Discount | Extra units you need to sell |
|---|---|
| 5% | 20% more |
| 10% | 50% more |
| 15% | 100% more |
| 20% | 200% more |
| 25% | 500% more |
The pattern gets steeper the closer the discount gets to your margin. Going from 15 to 20 percent off on a 30 percent margin takes the extra sales you need from 100 percent to 200 percent.
What the tables leave out
I can't know your margin. It changes from one product to the next, and your purchase bills are the only place to find it. Staples like atta, sugar and oil tend to sit lower than packaged snacks or personal care. Check each line before you decide what to discount.
The tables are also about gross margin. Rent, staff and wastage come out of that money afterwards, so your real cushion is thinner than the table suggests. And they assume the discount is the reason for the extra sales. During Diwali a crowd may buy more anyway, which means a discount can give away margin on customers you'd have had regardless.
What I'd offer instead
You can sell below MRP but never above it.[1] Since price can only go down, I'd rather grow the basket than cut the price.
- Spend-and-get. A small gift when the bill crosses a set amount. The gift has to cost less than the margin on the extra spend, so do that sum first.
- Bundles. A sweets-making kit or a tea-time combo at one round price, with little or no discount. Pair a thin-margin staple with add-ons that earn more.
- Hampers. Priced at or just under the sum of the items, with the margin kept at or above your store average.
- Buy 2, get 1 free. It's 33 percent off across three units, which is more than the whole margin in the 30 percent table. Run it only where your margin is well above a third or the supplier funds the free unit.
The rule I give store owners in the guide is short: never discount atta, oil, sugar or milk with your own money.
Where Flyerworks fits, and where it doesn't
Flyerworks won't calculate your margin for you, and it doesn't know your costs. The maths above is yours to do. Once you've picked the offer, it makes the flyer and the shelf tag. Shelf tags need a paid plan: Starter includes 5 a month, and Pro and Business are unlimited.
The Diwali Offer Guide has a page on margin and a 30-day calendar for the season. It's free with a Flyerworks account, and the first nine pages are open on the site. For the offers themselves, read seven Diwali offers and which are safe on thin margins.