You launch a promotion on your store; orders start rolling in, sales go up, and the results look encouraging. However, when reviewing the numbers, you might discover that the remaining balance from sales has actually decreased, despite the extra effort spent on order fulfillment and customer service. The discount that incentivized purchases also reduced what each product leaves behind to cover your store's overhead expenses and generate a profit.

Before launching an offer, you need to know how much of this amount you are conceding and the sales volume required to offset it. This relationship was one of the key insights discussed by Mohammed Al-Omari, a business development and financial performance analysis specialist, during one of Salla's merchant meetups. Through a simple example, you can see how a modest price discount can impact the sales outcome.

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

Suppose you sell a product for SAR 100, and the variable costs associated with its sale total SAR 90, which include the cost of goods, packaging, payment processing fees, shipping costs you cover, and any acquisition costs attributed to the sale. You are left with SAR 10 here, which helps cover fixed expenses—such as subscriptions, rent, and salaries—and then yields a profit.

In this article, we refer to this remainder as the contribution margin, which differs from net profit, as the latter is determined after factoring in all other business operational expenses.

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

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 by the discount percentage alone; you must compare it against what you were retaining prior to offering it.

The figures in this example are for illustrative purposes. Some costs may fluctuate with price or sales volume, so make sure to use your store's actual costs when applying the calculation.

Compensation | 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 SAR 1,000. After the discount, those 100 units yield only SAR 500. To achieve the same previous amount, you would need to sell 200 units, assuming unit variable costs and fixed overhead remain constant.

You can calculate the required quantity using this formula:

Required Quantity After Discount = Quantity Before Discount × Contribution Margin per Unit Before Discount ÷ Contribution Margin per Unit After Discount

Applying the numbers from the example:

100 units × SAR 10 ÷ SAR 5 = 200 units

This means you need to double the number of units sold to maintain the previous total contribution margin. If fulfilling the extra volume incurs additional expenses, such as hiring temporary staff, you will also need to account for them when evaluating the promotion's outcome.

This calculation provides your forecasts with a clear starting point: Can the offer drive the required increase? Do you have the inventory and operational capacity to fulfill it? If the projected increase falls significantly short, reconsider the discount percentage, the eligible products, or the campaign's objective.

Comparison | Why Does Discount Impact Vary Between Products?

You might offer the exact same discount rate across two products, yet the impact differs due to the difference in their contribution margins. Suppose both sell for SAR 100, but the variable costs for the first product are SAR 60, while for the second they are SAR 90.

The first product can absorb the discount with a much wider cushion, whereas the second loses half of its contribution. This makes reviewing products before rolling out a store-wide sale an essential step; a certain percentage may suit some products while depleting most of the remainder on others.

Start with the products you plan to include in the promotion, and calculate the discount's impact on each. If a cart contains multiple items, review the contribution margin of the order as a whole and its shared costs, ensuring you do not double-count shipping or customer acquisition costs.

The Objective | When Should You Settle for a Lower Margin?

You might opt to run a discount to liquidate slow-moving inventory, encourage trials of a new product, or acquire first-time customers. In such scenarios, accepting a temporary dip in margin in exchange for a specific outcome can be justified—provided you know the cost of the decision, its limits, and how you will measure its success.

If the goal is liquidating inventory, track the volume cleared, the amount recovered, and what remains. If the goal is customer acquisition, calculate their acquisition cost factoring in discounts and ads, and then monitor whether they actually make repeat purchases. If the goal is increasing the sales contribution toward covering fixed expenses and profit, compare the total contribution margin generated during the promotion against an equivalent period prior, while accounting for differences in spend and operational conditions.

Defining the objective also helps you manage the promotion's duration and allocated budget. An offer that concludes once a clear goal is met is far easier to evaluate than a continuous discount running simply because orders are coming in.

Alternatives | Is Another Offer Truly Less Costly?

After calculating the discount's impact, you might consider alternatives like free shipping, a complimentary gift with purchase, or a product bundle offer. Each option carries a cost that requires the same evaluation: What will the customer pay? What is the cost of the products, fulfillment, and incentive provided? And how much will remain for the store?

A free gift may allow you to deliver value that the customer appreciates at an optimal cost for you, while a minimum spend threshold for free shipping can tie the perk to larger average basket sizes. However, the outcome hinges on the cost of the gift, shipping, and the actual items purchased. Test promotional scenarios on projected cart values before launching, then review against real-world order performance.

Once you calculate your promotional costs, learn the steps to create a promotion on your Salla store.

Implementation | Five Questions to Answer Before Launching Your Offer

Prepare a simple spreadsheet listing the eligible products, their current retail price, variable costs, discount value, and post-discount contribution margin. Then, answer the following questions:

What is the goal of the offer? Define the intended outcome, such as moving a target inventory volume or boosting overall contribution margin.

How much is retained per unit or order? Calculate the remainder after deducting the discount and all selling-related costs.

What sales increase is required to make up for the discount? Benchmark this against realistic expectations based on past store performance and marketing campaigns.

Are there any additional expenses? Factor in extra advertising spend and operational overhead generated by the offer, avoiding double-counting.

When will you review the results? Determine the offer's duration, primary success indicators, and spend thresholds.

At the end of the promotion, compare your forecasts with actual outcomes: quantity sold, net sales after discounts and returns, variable costs, and total contribution margin. This evaluation will guide your next promotion based on verified returns for your business.

Before finalizing a discount percentage, write down two numbers next to it: how much you will retain from the sale, and how many units you need to sell to reach your target. Only then does an increase in order volume become a measurable metric whose true value you can clearly assess.

To master your business costs, break-even point, and cash flow, learn e-commerce financial fundamentals with Mohammed Al-Omari on Salla Academy.

Watch the Session | Deepen Your Understanding of Discounts' Impact on Profitability

In this Salla session, Mohammed Al-Omari discusses the relationship between pricing, costs, discounts, advertising, and cash flow, addressing merchant inquiries regarding their financial decisions. The discussion on the impact of discounts on margin 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 for sales.