Before a shop sale: calculate what a discount does to contribution

Define the purpose of the offer

A sale to clear obsolete stock has a different objective from a promotion intended to increase profit. Write down the purpose before choosing a percentage. Otherwise a busy weekend can look successful even when it delivers less contribution than ordinary trade.

Choose a small set of products to analyse. Use actual average selling prices and costs, including relevant packaging and payment costs. Keep the tax basis consistent. If costs vary with the sale price, recalculate them rather than assuming every cost stays fixed.

Work through the contribution per item

In this original simplified example, an item sells for £30 and has £18 of variable costs per sale. Contribution is £12. A 20% discount reduces the price to £24. Assuming the same £18 variable cost for illustration, contribution falls to £6.

The price fell by 20%, but contribution per item halved. To match the £1,200 contribution from selling 100 items at full price, the shop would need to sell 200 discounted items. That comparison excludes any extra staffing or other costs created by the promotion.

Include the sales you would have made anyway

The required increase is not simply 100 new customers. Some regular customers may buy discounted items they would otherwise have bought at full price. Others may bring forward next month's purchase. Track a suitable period after the offer as well as the promotional days.

General pricing guidance recommends planning discounts around costs and business goals. Your own calculation should also include additional staff time, campaign costs, expected returns and any limit on how much stock you can supply. Do not assume extra volume is either available or free to fulfil.

Further reading: Australian Government: Choose a pricing strategy

Choose a smaller test or a different offer

You could limit the offer to a product with enough contribution, set a quantity cap or test a bundle whose combined economics you understand. A free add-on still has a cost, so calculate it. Avoid using a discount to hide a product that customers do not want at any sustainable price.

For stock clearance, compare the cash recovered with realistic alternatives, such as continued storage or disposal, and record that the objective is recovery rather than normal margin. Keep legal pricing and advertising requirements in mind when showing comparisons or savings.

Offer check
Purpose and products:
Normal contribution per unit:
Promotional contribution per unit:
Extra fixed costs of the offer:
Expected units and capacity:
Full-price sales likely displaced:
Maximum commitment and review date:

Review contribution and cash separately

After the offer, use actual units, discounts and costs. Compare total contribution with a reasonable baseline and note uncertainty. Check whether the sale created a replenishment bill or returns that arrive after the cash feels available.

If discounted contribution is zero or negative, no increase in volume will restore positive contribution under those assumptions. Stop and reconsider the offer rather than relying on a busier shop to fix the arithmetic. A deliberate loss-making promotion needs a bounded budget and a clear, testable reason.