FA-101 · Module 3

Discount Math

3 min read

Discounts are the most expensive thing in sales that nobody tracks properly. A 20% discount does not cost you 20% of the deal. It costs you 20% of revenue but a much larger percentage of margin — because your costs do not decrease when your price does. If your gross margin is 75% and you discount 20%, you have eliminated 26.7% of your gross profit on that deal. Every point of discount is amplified by the margin structure. This is the math that most sales teams never see.

Base Deal:
  Contract Value:    $100,000
  COGS:               $25,000  (75% gross margin)
  Gross Profit:       $75,000

After 20% Discount:
  Contract Value:     $80,000  (-20%)
  COGS:               $25,000  (unchanged)
  Gross Profit:       $55,000  (-26.7%)

Margin Impact:
  Original Margin:    75.0%
  Discounted Margin:  68.8%
  Margin Erosion:      6.2 points

To recover the $20,000 in lost profit,
you need $26,667 in additional revenue
at the original 75% margin.

Do This

  • Calculate discount impact on margin, not just revenue — costs don't shrink with price
  • Track average discount percentage by rep, segment, and deal size
  • Require approval thresholds: 10% needs manager, 20% needs VP, 30%+ needs executive review
  • Offer value-adds instead of price cuts — training, extended support, premium features

Avoid This

  • Treat discounts as "the cost of doing business" without tracking their cumulative margin impact
  • Allow end-of-quarter discounting to become an expected buyer behavior
  • Discount to win a deal without calculating whether the deal is still profitable post-discount