A 10% price cut can require one-third more units to be sold just to preserve the same contribution towards overheads and profit. That is the result when an item priced at $50 has variable costs of $30 and those costs stay unchanged. The percentage taken off the price is a poor guide to the effect on the business.
The starting figures come from a teaching example in the Association of Chartered Certified Accountants’ explanation of cost-volume-profit analysis. They illustrate the arithmetic, rather than the results of a particular retailer.
A discount can bring in customers, clear stock or fill otherwise unused capacity. It can also reduce the money earned on purchases that would have happened at full price. Evaluating the offer requires both effects to be counted.
Begin with contribution per sale
Contribution is the selling price less the variable costs associated with a sale. Variable costs increase as more units are produced or sold. Depending on the business, they can include materials, packaging, delivery subsidies, payment fees and sales commissions.
As OpenStax’s managerial accounting text explains, contribution first helps cover fixed costs. Only the amount left after those expenses contributes to operating profit. A positive contribution per sale is not the same as a profitable business.
Using ACCA’s $50 price and $30 variable cost, the contribution is $20. Cutting the price by 10% makes it $45, leaving $15 of contribution. A 10% discount has reduced the contribution per unit by 25%.
Preserving the original total requires selling 20 divided by 15 times as many units, or approximately 33.3% more. Fixed expenses must remain unchanged, and the calculation excludes any additional cost of running the promotion.
The same starting assumptions produce the following calculations. These are illustrative results, not forecasts of customer demand.
| Discount | Selling price | Contribution per unit | Extra units needed to preserve contribution |
|---|---|---|---|
| None | $50.00 | $20.00 | None |
| 5% | $47.50 | $17.50 | 14.3% |
| 10% | $45.00 | $15.00 | 33.3% |
| 20% | $40.00 | $10.00 | 100% |
For a single product, the required sales-volume multiplier is the original contribution per unit divided by the discounted contribution per unit. If the discounted contribution is zero or negative, extra volume cannot preserve a positive contribution under these assumptions.
Count the customers who would have paid full price
A promotion reaching existing customers may discount orders that would have arrived anyway. Those purchases generate less contribution without adding volume. Extra orders must make up that loss as well as any advertising or administration costs.
Some customers may bring forward a purchase they would otherwise have made later. A busy promotional week can then be followed by quieter trading. Measuring only the offer period risks treating a shift in timing as additional demand.
The sales mix matters too. Customers might switch from a higher-contribution product to the discounted one. Alternatively, an offer might encourage them to add other profitable items. Evaluate the whole order and the observation period, including returns and cancellations.
For businesses with several products, contribution should be calculated using the expected mix of sales. An unchanged total revenue figure can conceal a shift towards products that leave less money after their variable costs.
Check the operating costs and the cash requirement
Higher volume may require overtime, temporary employees, extra deliveries or more customer support. A calculation based on unchanged unit costs becomes unreliable once the operation needs additional resources.
Capacity also has a cost. A discounted order that uses time otherwise available for full-price work may displace more profitable business. A promotion filling genuinely idle capacity has different economics from one taking space from customers already willing to pay the normal price.
Cash timing needs a separate check. The business may buy more stock and pay suppliers before collecting the additional sales. The Business Development Bank of Canada’s cash-flow guidance stresses forecasting receipts and payments, including money tied up in inventory.
A profitable offer can still strain working capital, the resources funding everyday operations. Model when cash enters and leaves, alongside the contribution calculation.
Our break-even calculator can show how changing the unit price affects the volume needed to cover specified costs. It cannot predict how many customers will respond to an offer.
Measure what happens after the offer ends
Price expectations can outlast a promotion. Tieyuan Guo’s 2026 research in the Journal of Behavioral Decision Making found that an extremely low previous price weakened subsequent purchase intentions across three studies, whether participants had bought at the earlier price or missed it.
As we reported, the experiments used shopping scenarios. They do not determine the best discount for a working business or establish that every deep promotion loses money.
Follow customers acquired through the offer beyond their first order. Record repeat purchases, the prices they subsequently pay and the cost of serving them. A forecast that depends on repeat business needs evidence of that behavior.
The offer’s objective determines what success looks like. A campaign intended to recruit repeat customers needs a different review from one clearing stock that is expensive to store or likely to become unsaleable.
For clearance stock, the decision concerns the cash recoverable now, remaining selling costs and the realistic alternative of holding or disposing of it. Historical purchase cost alone cannot decide that choice. Recording the objective before launch prevents an unsuccessful acquisition campaign from being reclassified afterwards as successful stock clearance.
