You launch a promotion on your store, orders start moving, sales rise, and the results look encouraging. However, when reviewing the numbers, you might find that the remaining profit from the sales has decreased, despite the extra effort put into order fulfillment and customer support. The discount that drove the purchases also cut into what each product contributes toward covering your store’s overheads and generating profit.

Before launching a promotion, you need to know how much of this revenue you are giving up, and the sales volume required to offset it. This dynamic was one of the key concepts discussed by Mohammed Al-Omari, business development and financial performance analysis expert, during one of Salla's webinars with merchants. Through a simple example, you can see how a small discount on price impacts the overall sales outcome.

The Calculation | How Does a 5% Discount Erode Half of the Margin?

Suppose you sell a product for 100 SAR, and the variable costs tied to its sale amount to 90 SAR, which includes product cost, packaging, payment gateway fees, your share of shipping costs, and any customer acquisition cost attributed to the sale. You are left with 10 SAR contributing toward fixed costs, such as subscriptions, rent, and salaries, and ultimately generating profit.

In this article, we refer to this remainder as the contribution margin, which differs from net profit that is determined after accounting for all remaining operational expenses.

If you offer a 5% discount on the retail price, the customer will pay 95 SAR. Assuming variable costs remain constant at 90 SAR, the contribution margin drops from 10 SAR to just 5 SAR.

The discount here equals 5% of the price, but it consumes 50% of the contribution margin. Because of this, you cannot evaluate the impact of an offer based on the discount percentage alone; you must compare it to what you were retaining prior to offering it.

The figures in this example are for illustration purposes. Certain costs may fluctuate with price adjustments or sales volume, so make sure to use your store's actual costs when running these calculations.

The Breakeven Volume | How Much Do You Need to Sell After the Discount?

In the previous example, selling 100 units at the original price yields a total contribution margin of 1,000 SAR. After the discount, those 100 units yield only 500 SAR. To achieve the same initial amount, you would need to sell 200 units, assuming unit variable costs and fixed overheads remain unchanged.

You can calculate the required volume using this formula:

Required Volume After Discount = Volume Before Discount × Unit Contribution Margin Before Discount ÷ Unit Contribution Margin After Discount

Applying the figures from the example:

100 units × 10 SAR ÷ 5 SAR = 200 units

This means you need to double the number of units sold to maintain the same total contribution margin as before. If handling this extra volume incurs additional expenses, such as hiring temporary staff, you will also need to factor those in when assessing the promotion’s outcome.

This calculation provides a clear baseline for your projections: Can the promotion realistically generate the required increase? Do you have the inventory and operational capacity to fulfill it? If the projected increase falls far short, reconsider the discount rate, eligible products, or the overarching campaign objective.

The Comparison | Why Does Discount Impact Vary Between Products?

You might apply the exact same discount percentage to two different products, yet see vastly different impacts due to variations in their contribution margins. Suppose both sell for 100 SAR, but the variable costs for the first product are 60 SAR, while the second product’s variable costs are 90 SAR.

The first product absorbs the discount with comfortable breathing room, whereas the second loses half of its contribution margin. This highlights why reviewing individual products prior to launching store-wide promotions is vital; a given percentage might work well for some items while wiping out margins on others.

Start with the specific products you plan to include in the offer, and calculate the discount’s impact on each one. If an order contains multiple products, assess the contribution margin of the entire order along with its shared costs, so you avoid double-counting shipping or acquisition costs.

The Objective | When Should You Accept a Lower Margin?

You may choose to offer a discount to liquidate slow-moving stock, encourage trials of a new product, or acquire first-time customers. In such scenarios, accepting a temporary dip in margin in exchange for a defined result can make sense, provided you understand the costs, limits, and how you will measure success.

If the objective is clearing stock, track the quantity moved, the recovered capital, and what inventory remains. If the goal is customer acquisition, calculate customer acquisition cost (CAC) taking into account the discount and advertising spend, then monitor actual repeat purchases. If the goal is increasing the sales contribution toward covering overheads and profit, compare the total contribution margin generated during the promotion against an equivalent prior period, accounting for variances in spend and market conditions.

Defining the objective also helps you set the promotion’s duration and dedicated budget. An offer designed to conclude upon hitting a clear target is much easier to evaluate than a rolling discount maintained simply because orders are coming in.

The Alternatives | Is Another Offer Truly Less Expensive?

After calculating the impact of a direct discount, you might consider alternatives like free shipping, a complimentary gift with purchase, or a bundled offer. Each alternative carries costs that require the exact same breakdown: What will the customer pay? What is the cost of the goods, fulfillment, and incentive provided? And what net margin remains for the store?

A gift might allow you to offer perceived value that customers appreciate at a cost-effective price point for you, while a minimum spend threshold for free shipping can encourage higher average order values. However, the outcome depends on the cost of the gift, shipping, and the actual products purchased. Model the numbers on projected baskets before launching, then review real customer orders afterwards.

Once you have calculated the cost of your offer, discover how to set up promotions on your Salla store.

Implementation | Five Questions to Answer Before Launching

Prepare a simple spreadsheet listing the eligible products, noting down current retail prices, variable costs, discount values, and the resulting contribution margins. Then, address the following:

What is the promotion's objective? Define the intended outcome, such as liquidating specific inventory volumes or boosting overall contribution margin.

How much margin remains on each unit or order? Calculate the net amount remaining after deducting discounts and sales-related variable costs.

What sales increase is required to offset the discount? Benchmark this against realistic projections based on past store and marketing performance.

Are there incremental expenses? Factor in additional ad spend and operational costs triggered by the promotion, without double counting.

When will you evaluate the results? Determine the campaign duration, key performance metrics, and spend ceilings.

At the end of the promotion, compare your projections with actual metrics: units sold, net revenue after discounts and returns, variable costs, and total contribution margin. This retrospective analysis will help inform smarter promotional strategies for your store in the future.

Before committing to a discount rate, write down two key figures next to it: how much margin you retain per sale, and how much volume you must move to achieve your goals. With those defined, higher order volumes become a metric you can measure with confidence.

To better understand your store costs, breakeven points, and cash flow management, learn e-commerce financial fundamentals with Mohammed Al-Omari on Salla Academy.

Watch the Webinar | Deepen Your Understanding of Promotional Impact on Profitability

In this Salla session, Mohammed Al-Omari examined the interplay between pricing, cost structures, discounting, marketing, and cash flow, answering merchants' questions on key financial decisions. The discussion on the impact of discounts on margins begins at minute 19:31 of the recording.

Planning to launch your e-commerce business? Create your store on Salla, and start setting up your products and pricing ready to sell.