A discount often seems like a modest concession: reducing the price by ten percent may appear to be an easy way to increase sales. Its economic effect, however, depends on the part of the price that remains after the variable costs.
Let's imagine a product sold for 100 euros, with a variable unit cost of 60 euros. The contribution margin is 40 euros. If the price falls to 90 euros and the cost remains the same, the margin falls to 30 euros: the margin reduction is 25 percent. To obtain the same 400 euros produced by ten initial sales, it would take about 13.33 units; with indivisible units, at least fourteen. It is a hypothetical arithmetic example, net of VAT and without variations of other costs.
The contribution margin does not coincide with the profit. It still has to help cover rents, staff and other fixed costs. If the increase in volumes requires new resources or causes more returns, the convenience changes further.
A discount can be reasonable to reduce stocks that are difficult to sell or reach new customers. To evaluate this, it is necessary to distinguish additional purchases from those that would have occurred anyway at full price.
Before a promotion it is therefore advisable to clarify the objective and measure the result on the overall margin, together with the effects on stock and receipts. The number of pieces sold, taken alone, leaves out a decisive part of the evaluation.