Minimum Discount for Profit Calculator

Finding the floor

Every product has a discount at which contribution reaches zero, and knowing it is the precondition for any promotional decision.

It is the point where the discounted price equals the variable cost: goods, payment fees, shipping, packaging, fulfilment labour and the attributable returns cost.

On a £60 item with £38 of variable cost, the floor is a 36.7% discount. Beyond that every unit sold costs money, and volume makes it worse rather than better.

What belongs in the variable cost

The list is longer than most sellers use, and every omission raises the apparent floor and hides losses.

Cost of goods including freight and duty. Payment processing, which is percentage-based and therefore falls with the discount. Marketplace referral fees, same. Outbound shipping and packaging, which do not fall with the discount and are therefore proportionally worse on discounted orders. Pick and pack labour. Expected returns cost per unit sold.

The last two are the ones most often missed, and together they can be several pounds a unit. A floor calculated without them will be several percentage points too generous, which is exactly the error that turns a promotion into a loss.

The floor is not the target

Selling at exactly the floor generates zero contribution, which means the business has done work for nothing. There has to be a required contribution above it.

A common approach is a minimum contribution percentage below which no promotion may price. Setting it at half the normal contribution margin is a defensible starting point.

Whatever the level, it should be enforced in the tooling rather than in the guidelines. A promotion configuration that will not accept a price below the floor prevents the error; a policy document does not.

When selling below the floor is correct

There are cases where a loss-making price is the right decision, and they should be deliberate rather than accidental.

Clearing stock that would otherwise be written off entirely. Recovering some value beats recovering none, and the comparison is against disposal rather than against full price.

Loss leaders, where the item is priced below cost to acquire a customer who will buy other things. This works when the basket economics support it and fails badly when customers buy only the leader, which is the common outcome online where there is no aisle to walk down.

Applying it across a catalogue

Calculating the floor per SKU across a large catalogue is a spreadsheet exercise and the output is a maximum discount per product.

That table is what should drive promotional planning. Rather than choosing a discount and checking whether it works, start from what each product can bear and build the promotion within it.

The by-product is a view of which products can carry promotion and which cannot, and that view is useful well beyond promotions. Products with no discount headroom are products with no defence if a competitor discounts, and knowing which those are before it happens is worth the afternoon it takes to work out.

It also gives buyers a specification. A product that has to survive a competitive category needs discount headroom built in at the point it is sourced, which means a target landed cost rather than a target margin. Setting that requirement before an order is placed is considerably easier than discovering after the stock arrives that the product cannot be promoted without losing money, which is a discovery usually made in the middle of a competitor's sale.