If you discount products in an online shop, you need to know your margin. Otherwise nobody can tell whether a promotion makes money or only moves revenue. This article explains the formulas, works through examples and shows in one table how much more you need to sell after a discount to earn the same.
Margin and markup: two different numbers
Both describe the gap between cost and selling price, but on a different base. Mixing them up makes a shop look more profitable than it is.
- Margin is based on the selling price:
Margin = (Selling price − Cost) ÷ Selling price - Markup is based on the cost:
Markup = (Selling price − Cost) ÷ Cost
Example: a product costs you €30 net and sells for €50 net. Gross profit is €20. The margin is 20 ÷ 50 = 40 %, the markup 20 ÷ 30 = 66.7 %. A 100 % markup therefore equals a 50 % margin.
Always calculate net of VAT
VAT belongs to the tax office, so calculate margins and discounts on net prices. In Germany a gross price of €59.50 at 19 % VAT is €50.00 net (59.50 ÷ 1.19). A percentage discount affects gross and net prices equally: 20 % off the gross price is also 20 % off the net price.
For an honest calculation, include the variable costs per order besides the purchase price: payment fees, shipping, packaging and returns. The margin after these costs is the contribution margin, and it is the better basis for discount decisions.
What a discount does to your margin
A discount lowers the selling price but not the cost, so it comes entirely out of the margin. In the example above:
- No discount: €50 price, €20 gross profit, 40 % margin.
- 20 % discount: €40 price, €10 gross profit, 25 % margin.
The discount is 20 % of the price but halves the gross profit per unit. That is why the key question before any promotion is not "how much discount?" but "how much more do I need to sell?".
The formula for the extra volume you need
With margin m and discount d, both as a share of the selling price:
Required volume = m ÷ (m − d)
At a 40 % margin and a 20 % discount: 0.40 ÷ 0.20 = 2. You need to sell twice as many units to earn the same gross profit. If the discount equals the margin, you no longer earn anything on any unit.
Table: extra volume needed after a discount
| Margin | 10 % off | 15 % off | 20 % off | 25 % off | 30 % off |
|---|---|---|---|---|---|
| 30 % | +50 % | +100 % | +200 % | +500 % | no profit |
| 40 % | +33 % | +60 % | +100 % | +167 % | +300 % |
| 50 % | +25 % | +43 % | +67 % | +100 % | +150 % |
| 60 % | +20 % | +33 % | +50 % | +71 % | +100 % |
| 70 % | +17 % | +27 % | +40 % | +56 % | +75 % |
How to read it: at a 50 % margin and a 20 % discount you need 67 % more units sold to earn the same gross profit as without the discount.
When a discount still pays off
The table only counts the gross profit on the discounted products. A promotion can still be worth it below that threshold:
- Leftover and excess stock: stock that would otherwise sit ties up cash and storage. See How to sell leftover stock.
- New customers: a first-time buyer who comes back is worth more than the first order.
- Add-on purchases: buyers who come for a reduced product often add something at full price.
The other way round, a discount costs more than the table shows when it reaches buyers who would have bought anyway.
Practical rules for discount campaigns
- Calculate with the contribution margin after variable costs, not only the purchase price.
- Discount selected products rather than the whole range.
- Limit the promotion in time and quantity so it does not become the permanent price.
- After the promotion, check whether the extra volume reached the threshold in the table.
This is how flash sales run on Heartly: selected products, a fixed duration, a stock limit and a dedicated sale page from which buyers go straight to your cart with the discount applied.
Frequently Asked Questions
How do I calculate margin?
Margin = (selling price − cost) ÷ selling price, both net of VAT. At a €50 selling price and €30 cost the margin is 40 %.
What is the difference between margin and markup?
Margin is based on the selling price, markup on the cost. €20 gross profit at €30 cost and €50 price is a 40 % margin but a 66.7 % markup.
How much more do I need to sell after a discount?
Required volume is margin ÷ (margin − discount). At a 40 % margin and a 20 % discount you need twice the volume, so 100 % more units.
Should I use gross or net prices?
Net prices. VAT is not income for the shop. A percentage discount lowers gross and net prices by the same percentage.
At what point does a discounted product stop making money?
When the discount equals the margin. At a 30 % margin, a 30 % discount leaves no gross profit, before variable costs per order.