Pricing
The discount break-even formula.
Enter your item cost and discount depth. See the exact point where your margin hits zero. Run it before every promo.
Discounts feel like growth. The register rings more. The line gets longer. But every discount has a point where you are selling at cost, and past that point you are paying customers to take your product.
Most operators never calculate that point. This guide makes it a 60-second habit.
The formula
Break-even discount
Max discount = 1 − (item cost ÷ price)
Profit on a discounted sale = (price × (1 − discount)) − item cost. When that number hits zero, you are working for free.
A worked example
Take an eighth that retails at $50 and costs you $25 landed. Your full-price gross profit is $25.
- 20% off: $40 sale price. Profit is $15. You gave up $10.
- 30% off: $35 sale price. Profit is $10. You gave up $15.
- 50% off: $25 sale price. Profit is $0. You made nothing.
Read that last line again. Half off on a standard-margin item means zero gross profit before rent, labor, taxes, or card fees. A 50% off promo is not a sale. It is a donation drive.
The rule of thumb
Never discount below two times your item cost unless you have done the lifetime-value math and it checks out. For the $50 eighth above, the floor is $25. Anything deeper needs a reason beyond "drive traffic."
There are valid reasons to go deep: clearing dead inventory that is tying up cash, acquiring a first-time buyer you can retain, or matching a competitor on a loss-leader you chose deliberately. "It is 4/20" is not a reason. It is a habit.
Watch the stacking traps
The discount you advertise is rarely the discount the customer gets. Loyalty points, veteran discounts, first-time buyer deals, and promo codes stack. Audit your real average discount per transaction, not the one on the flyer.
- Loyalty points: 5% back in points on a 20% off sale is effectively 25% off.
- BOGO: Buy one get one free is 50% off. Run the example above before you print that sign.
- Tax-included pricing: If you advertise tax-included prices, the discount comes off your margin, not the customer's tax bill. Factor it in.
When discounts actually work
Discounts are a tool. The question is what job you are hiring them for.
Clearing aging inventory: Product sitting 90+ days is dead cash. A deep discount that recovers your cost is better than a write-off. Price it to move, not to impress.
First-visit acquisition: A strong first-time offer can work if you have a retention system to catch the second visit. Without one, you bought a one-time customer at full cost. See our retention guide.
Slow-day traffic: Tuesday afternoons need bodies. A targeted weekday deal fills the room without training weekend customers to expect discounts.
Do this week
Audit your real discount depth
- Pull last month's transactions. For your top 20 SKUs, compute the actual average discount including stacked loyalty and promos.
- Run the break-even math. For each SKU: max discount = 1 − (cost ÷ price). Flag any SKU selling below its floor.
- Kill one bad promo. Find the deepest discount with the weakest reason. Replace it with a targeted offer or nothing.
- Set a house rule. No promo goes live without the break-even number written on the plan. One line. Every time.
Examples use illustrative numbers. Your costs and margins differ. Run this math on your own data.