Two numbers, and pricing advice keeps swapping them
"Give a 10% discount on a 25% margin and you need 50% more sales." You will read that, or something like it, in most articles on discounting. It is a correct number attached to the wrong question.
50% is the extra revenue. The extra jobs is 66.7%.
Both come from the same scenario. After the discount every job brings in less, so the revenue climbs more slowly than the job count: sell 66.7% more jobs at 90% of the price and you land on 50% more revenue. The two are related and they are not interchangeable.
The one that matters when you are deciding is the job count, because that is the work you have to go out and win. This page always shows both, labelled, so they cannot get swapped.
The gap widens as the discount deepens
At a small discount the two numbers are close enough that using the wrong one is a rounding error. At a large one they are far apart, and a large discount is exactly when somebody is reaching for a number to justify a decision.
Which is the awkward shape of this particular error: it is harmless when it does not matter and worst when it does.
The discount that gives the work away
A discount equal to your margin puts the price back to cost. Exactly. There is no volume that recovers it, because every extra job is done for nothing.
So the useful thing is not the discount percentage but how far through your margin it is. A 10% discount on a 25% margin is 40% of the way to working for free. On a 15% margin the same 10% discount is two thirds of the way. Same discount, completely different decision, and the percentage on its own tells you neither.
The other direction, which nobody builds
Every discount calculator on the internet does the discount half. Almost none of them do the price rise, and the price rise carries the better result.
A rise of r lets you lose r รท (m + r) of your customers and stand still. On a 20% margin, a 10% rise survives losing a third of them.
That is a different question from the one people ask themselves, which is "will anybody leave". Somebody always might. The answerable question is how many you could afford to, and it is usually a much larger number than the fear suggests.
And the part that reverses the instinct
The thinner your margin, the more customers a price rise can afford to lose.
- 50% margin, 10% rise: survives losing 16.7% of customers.
- 20% margin, 10% rise: survives losing 33.3%.
- 10% margin, 10% rise: survives losing 50%.
The instinct is the other way round entirely: a business scraping along on thin margins feels like it cannot afford to lose anybody. In fact almost none of that extra pound is going anywhere except the bottom line, so it has the least to lose by trying and the most to gain if it works.
That is the same leverage the gross versus net page shows from the other end, and it is why a thin margin is an argument for looking at prices before looking at costs.
Your margin afterwards is not your margin now
Worth stating because it is quietly forgotten. Discount by 10% on a 25% margin and you are on a 16.7% margin afterwards, measured against the new price. Put prices up 10% on a 20% margin and you are on 27.3%.
Businesses carry on quoting the old figure for years after the change that moved it, which is how somebody ends up confidently describing a margin they left behind two price lists ago.
What the arithmetic will not tell you
Whether to do it. This works out how much room you have, and room is not a decision.
Who leaves matters more than how many: losing a third of your customers is fine if they were the third that argued about every invoice, and a disaster if it was the one paying half your overheads. And how you tell people changes the answer, because a rise with notice and a reason lands very differently from one that appears on an invoice.
Common questions
How much more do I need to sell to cover a discount?
At a 25% margin, a 10% discount needs 66.7% more jobs. Not 50%. The 50% figure is the extra revenue for the same scenario, and it gets quoted as though it answered the volume question. Both numbers are correct answers to different questions, and the jobs figure is what matters to you, because that is the work you have to go out and win.
Why are the units and revenue figures different?
Because after a discount every job brings in less money, so the revenue goes up more slowly than the job count. Sell 66.7% more jobs at 90% of the price and you have 50% more revenue. The gap between the two widens with every point of discount, which is why swapping one for the other gets worse exactly when it matters most.
How many customers can I afford to lose if I put prices up?
More than you think, and the formula is short: the rise divided by the margin plus the rise. On a 20% margin a 10% rise survives losing a third of your customers. It is the question worth asking about a price rise and almost nobody asks it, because the question people ask instead is "will anybody leave", which has no useful answer.
Does a thin margin mean I cannot risk a price rise?
The opposite, and this is the most counter-intuitive result on the page. On a 50% margin a 10% rise survives losing 16.7% of customers. On a 10% margin the same rise survives losing half of them. The thinner your margin, the more of each extra pound goes straight to the bottom line, so the thin-margin business has the least to lose by trying.
What discount would wipe me out completely?
One equal to your margin, exactly. A 25% discount on a 25% margin puts the price back to cost, so there is no volume that recovers it: every extra job is done for nothing. That ratio is more useful than the percentage on its own, because it tells you how much room you have. A 10% discount on a 25% margin is 40% of the way to giving the work away.
Is markup the same as margin?
No, and putting a markup in the box on this page will give you the wrong answer. Margin is the profit as a share of the price; markup is the profit as a share of the cost. A 25% markup is a 20% margin. The markup and margin tool converts between them and explains the difference, so give it two minutes if you are not certain which of the two your usual number is.
Does this tell me whether to do it?
No. It tells you how much room the arithmetic gives you, and that is as far as arithmetic goes. Who leaves is not the same as how many, losing your best customer is not the same as losing your worst, and a rise announced with notice and a reason lands very differently from one that turns up on an invoice. Those are your calls.