Discounts and promotions are a go-to strategy for boosting sales in eCommerce, but they can also have an unexpected impact on your profitability. If not managed correctly, they can shrink your margins and hurt your bottom line. But don’t worry—this guide breaks down how to use discounts strategically, with real-world examples and actionable steps, so you can make promotions work in your favour while protecting your profits.
1. The Real Cost of Discounts: More Sales, Less Profit?
Discounts can boost your sales volume, but the reality is they can also reduce your profit per sale. To run profitable promotions, you need to weigh the potential sales increase against the loss in revenue per item. A strategic approach here is to only offer discounts where you can reasonably expect to increase sales volume enough to offset the reduced margins.
Example: Let’s say you sell a product for $50, and it costs you $30 to make. Your gross profit per unit is $20. If you offer a 20% discount, your new selling price becomes $40, and your profit shrinks to $10 per item. You now need to sell twice as many units just to make the same total profit.
Takeaway: Before offering discounts, calculate how much profit you’re giving up and whether the expected increase in sales will make up for it. Use this simple formula:
Profit After Discount = Sale Price – Cost of Goods Sold (COGS).
Pro Tip: A small price cut could require double the sales just to break even, so always run the numbers before proceeding with any promotion.
2. Boosting Sales with Discounts: When and How to Use Them
Discounts should be used strategically to serve specific goals, like clearing out excess inventory or increasing sales during slow periods. Rather than offering broad discounts across your entire store, consider focused promotions that encourage higher spending or target specific products.
Example: If you have a backlog of older inventory, try a limited-time sale on those items to clear space for new stock. Or, use a "buy more, save more" promotion to encourage customers to increase their cart value. For example, offering $10 off orders over $100 is an effective way to increase average order size without drastically cutting into profits.
Takeaway: Always have a clear objective for your promotions, whether it's moving old stock or boosting sales during a slow season. Align your promotions with your business goals to make them more effective.
Pro Tip: Free shipping or bundling high-margin products can often drive more sales without cutting into your profits as much as percentage discounts.
3. Calculate Your Break-Even Point for Promotions
Before running any promotion, it’s crucial to understand how much extra volume you need to sell to break even. Discounts reduce your profit per item, so you’ll need to sell more products to maintain the same overall profit. The key strategy here is calculating your break-even sales increase.
Example: If you offer a 20% discount, you’ll need to increase sales by 25% to break even. For example, if you typically sell 100 units, you’ll need to sell 125 units at the discounted price just to maintain your profit level.
Takeaway: Use the formula below to calculate the necessary sales increase:
Break-Even Sales Increase (%) = (Discount % ÷ (1 - Discount %)) × 100.
Pro Tip: Always calculate your break-even point before running promotions to ensure you’re not losing money. Don’t guess—use data from past promotions to set realistic expectations.
4. Targeted Promotions: Maximise Value by Reaching the Right Customers
One effective way to make discounts work for your business without hurting your profits is by targeting specific customer segments. Offering discounts to everyone can significantly reduce your margins, but a targeted promotion can deliver results with fewer downsides.
Example: Let’s say you’ve identified a group of repeat customers who often spend more than new customers. You could offer them an exclusive discount on new products or use email segmentation to send personalised offers based on their purchase history. This way, you're rewarding loyalty and driving higher-value purchases without giving up margin on less profitable sales.
Takeaway: Use customer data and tools like email segmentation to offer personalised promotions to high-value customers. This ensures you’re driving sales where it counts most.
Pro Tip: Targeted promotions not only boost sales but also create a sense of exclusivity, which can increase customer loyalty and retention over time.
5. Test and Learn: Experiment With Different Types of Promotions
Not all promotions will have the same impact on your business. The key strategy here is to test different types of discounts and assess which ones drive the most profit. Whether it’s percentage discounts, free shipping, or bundled offers, testing and learning will help you find the sweet spot.
Example: You could run an A/B test by offering half your customers a 10% discount and the other half free shipping. Track which promotion drives more sales and, more importantly, which one contributes most to your overall profit. You might find that free shipping works better because it feels like a great deal to customers but doesn’t hurt your margins as much as a price cut.
Takeaway: Always test your promotions in small batches before rolling them out on a larger scale. This way, you’ll be able to assess the effectiveness and profitability of each type of offer.
Pro Tip: Use analytics tools to track the performance of different promotions and make data-driven decisions for future campaigns.
6. Don’t Let Discounts Become Expected: Avoid Over-Promoting
Offering too many discounts can lead to customers expecting deals all the time, which can lower the perceived value of your products and harm your long-term profitability. The strategy here is to space out promotions and only run them when necessary.
Example: If you run frequent sales—say, a 20% off sale every month—customers will start to wait for the next discount instead of buying at full price. This not only reduces your average order value but also conditions customers to only buy during sales periods.
Takeaway: Avoid over-promoting. Use discounts strategically for events like holidays or product launches to create urgency and excitement without training your customers to expect regular discounts.
Pro Tip: Focus on creating value outside of discounts, like offering excellent customer service or unique product features, to keep customers coming back at full price.
7. Review the Impact on Your P&L: Track Success, Adjust for the Future
After every promotion, take time to review how it impacted your profit and loss statement. Promotions that drive a lot of sales aren’t necessarily good for your business if they end up shrinking your margins. The key here is to always assess whether the promotion delivered the expected results.
Example: Let’s say you run a 20% off sale and see a 30% increase in sales. However, after reviewing your P&L, you realise that your profit only increased by 5% due to the reduced margins and additional shipping costs. In this case, the promotion might have driven volume but wasn’t as profitable as you had hoped.
Takeaway: After every promotion, review your P&L to assess how much revenue and profit were generated. Adjust your strategy for future promotions based on these insights.
Pro Tip: Keep a record of all your promotions and their outcomes so you can refine your strategy over time and avoid repeating less successful campaigns.
Conclusion: Run Promotions That Grow Sales—Not Shrink Profits
Discounts and promotions can be an incredibly effective way to grow your eCommerce business, but they need to be managed carefully. By understanding how discounts impact your P&L, targeting the right customers, and testing different strategies, you can run promotions that boost sales without sacrificing profitability.
Last but not least, the key is to run smarter promotions, not just bigger ones. Always track the results of your discounts, and don’t forget to review your P&L after every promotion to ensure your business stays profitable in the long run.
Ready to optimise your next promotion? Download our free eCommerce Profit Loss Template to plan smarter and more profitable discounts!