Discounts feel small at the counter and large in the accounts. The reason is contribution margin: what is left from each sale after variable costs.
The arithmetic
Suppose an item sells for ₹100, variable costs are ₹70 and contribution is ₹30. A 5% discount cuts the price to ₹95 and contribution to ₹25 — a 17% drop in contribution per unit. To earn the same total contribution you must sell 20% more units.
Break-even
Break-even sales = fixed costs ÷ contribution margin ratio. With fixed costs of ₹3 lakh a month and a 30% margin, break-even is ₹10 lakh of sales a month. At a 25% margin it rises to ₹12 lakh.
What to do
- Know the contribution margin of your main products and customers.
- Give discounts for something you value: early payment, larger orders, or commitment.
- Track discount as a separate line in your sales reports.
Use the break-even calculator in Tools to test your own numbers.
