How Much More Must We Sell at a 10% Discount? Why Profits Can Shrink Even When Sales Increase

A situation where sales volume increases but profits actually decrease prompts us to re-examine the criteria for pricing decisions. While the discount rate is a figure visible to customers, the changes that a company must absorb focus not on the entire selling price, but on the amount remaining after selling a single unit. Even when discounting the same amount, the required additional sales volume varies greatly depending on the cost structure. Evaluating a promotion based solely on order volume and sales revenue can result in recording a situation where more work is done yet fixed costs are not recovered as a success.

The starting point for reading this issue is the contribution margin. Calculated by subtracting the variable costs that increase in association with the sale from the selling price, it first covers fixed costs and then serves as the financial resource for generating profit. The break-even guidance from the U.S. Small Business Administration (SBA) also presents a structure in which fixed costs are divided by the contribution margin per unit to calculate the required sales volume. This is why asking what and how much more must be sold before lowering prices is more important than simply comparing discount rates.

A 10,000-Won Change in Price Has a Greater Impact on Remaining Funds

For example, assuming a selling price of 100,000 won per unit and a variable cost of 60,000 won, the contribution margin per unit is 40,000 won. If monthly fixed costs are 4 million won, selling 100 units covers those fixed costs. If the selling price is lowered by 10% to 90,000 won here while unit variable costs remain unchanged, the remaining contribution margin per unit drops to 30,000 won. Although the price decreased by 10%, the reduction in the contribution margin amounts to 25%.

Even after the discount, selling 100 units yields a total revenue of 9 million won, variable costs of 6 million won, and a total contribution margin of 3 million won. Factoring in the monthly fixed cost of 4 million won leaves a deficit of 1 million won. To increase sales volume and reach the break-even point, approximately 133.33 units are needed by dividing 4 million won by 30,000 won, and if products are sold in integer units, at least 134 units must be sold. Under the same conditions, escaping a deficit requires selling 34 more units, which means the calculation that a 10% volume increase is sufficient for a 10% discount is incorrect.

Viewing this in terms of sales revenue makes the judgment clearer. Previously, selling 100 units reached the break-even point with 10 million won in revenue, but the revenue from selling 134 units after the discount is 12.06 million won. After subtracting variable costs of 8.04 million won and fixed costs of 4 million won, the profit remains at a meager 20,000 won. Even though sales increase by over 20%, the actual result barely exceeds the previous break-even level. This formula explains why sales growth and profitability improvement cannot be used interchangeably when evaluating pricing policies.

What matters in the above calculation is not the conclusion that a 34% volume increase is necessary for all companies, but rather the starting point of the contribution margin. The larger the share of variable costs in the original price, the greater the portion of the remaining amount accounted for by the same discount amount. Conversely, if variable costs can be lowered through bundled shipping or manufacturing process modifications, calculations after a discount will also change. This is why a process of reviewing a table that simultaneously changes prices and variable costs is necessary rather than a procedure that merely approves discount rates.

Sales Costs Easily Omitted from Cost Tables

The contribution margin varies depending on what is included in variable costs. If only raw materials are included while additional costs incurred according to sales—such as packaging, payment processing, and delivery—are omitted, the amount remaining from selling one more unit may appear larger than it actually is. On the other hand, if monthly rent that has already occurred is included again as product-specific variable costs while also being deducted from fixed costs, the same expense is counted twice. The criterion for classification is how the amount moves when sales volume changes rather than the name of the expense.

Commission structures are also connected to price changes. Contracts that require paying a fixed percentage of the selling price as a commission may see commissions decrease alongside the discount, whereas contracts charging a flat fee per order or applying minimum charges show different movements. Free shipping conditions likewise alter the per-unit burden depending on order amounts and bundled quantities. Calculating the profit and loss of a new promotion using a single past average cost ratio without reflecting actual contracts can underestimate or overestimate the effects of a price reduction.

Returns can create a cost structure that does not end with canceling an order. Even if sales proceeds are refunded, packaging materials already used, return shipping costs, and working hours for resale may remain. In evaluating a promotion, an appropriate approach is to separate received orders from final confirmed sales and connect the costs remaining after refunds to the performance of the same period. This is why products with a high probability of returns should not have their discount effects finalized based solely on sales immediately following the transaction.

In service products, how human time is handled creates a similar problem. Cost structures differ between sections where additional orders can be handled using existing personnel's idle time and sections requiring outsourced labor or additional personnel deployment. Rather than defining labor costs as strictly fixed or strictly variable at all times, it is more useful to identify at what volume actual cash expenditures begin to increase. As the scope of provisioning broadens, work hours per customer must also be recorded to reveal the relationship between pricing and operations.

Available Volume and Required Volume Are Different

The break-even quantity is the required sales volume, not orders secured in the market. Yale School of Management break-even analysis materials also explain the analysis focusing on the relationship between sales volume, price, unit variable cost, and fixed costs. Converting the quantity calculated by contribution margin into a demand forecast requires separate grounds regarding customer actual choices. The mere fact that 134 units are needed due to a discount does not create a reason for consumers to purchase that quantity.

If the maximum monthly supply capacity under the previous conditions is 120 units, the break-even point after a 10% discount lies outside current production capacity. Even if all 120 units are sold, the contribution margin is 3.6 million won, failing to cover the 4 million won fixed cost. Although supply can be increased using larger facilities or outsourcing, if additional costs arise in the process, the break-even point must also be recalculated. This is a conflict that can occur if the sales team's volume target and the operations team's processing limit are approved separately.

Advertising expenses are also an item to be reviewed alongside increases in sales volume. If new advertising expenses are spent on a product previously sold through organic traffic to generate additional orders, evaluating promotion profitability based solely on the post-discount contribution margin is difficult. When the connection between advertising execution amounts and new orders is unclear, it is better to separate traffic channels and purchase timing rather than attributing all orders to advertising performance. In calculating customer acquisition costs, the problem remains of distinguishing new demand from portions where original regular-priced orders shifted due to the discount.

For example, if orders increased during the discount period but next month's orders decreased by a similar margin, the possibility that some purchases were brought forward can be examined. However, because explanations vary depending on seasonality, other promotions, or supply shortages, causes cannot be determined solely through simple month-on-month comparisons. Setting a period to examine the flows of promotion-targeted and non-targeted products together, and linking individual customer past purchase records where possible, reinforces the basis for judgment. This is the process of confirming whether the increase in orders immediately following a discount represents sustainable growth.

When Product Mix Changes Before Sales Volume

For companies selling multiple products together, the trap of the average contribution margin exists. If the discount target is primarily products with a low contribution margin, the overall product composition may change disadvantageously even if total sales volume increases. Conversely, if the discount of a basic product sufficiently increases the contribution margins of items purchased together, conclusions drawn when looking solely at individual products differ from those when looking at total orders. In such businesses, product-specific profit and loss must be placed side by side with order-unit profit and loss to reveal the meaning of bundled sales.

It is also necessary to distinguish whether bundled purchases actually occurred or if product sales simply increased in the same month. Linking products included in the same order number, per-order shipping costs, and refunded items allows the economic feasibility of purchase bundles to be calculated concretely. Covering the shortfall of discounted products with profits from high-margin products purchased by separate customers is a different story from the performance of the promotion itself. Raising average sales revenue and securing additional contribution margin due to discounts are separate goals.

Policies offering discounts exclusively to new customers entail additional issues of qualification verification and operations. Failing to distinguish between first-time orders and repeat orders allows the same customer to utilize benefits multiple times while being counted as a new acquisition. Furthermore, if the plan is to recover the deficit of a first purchase through future repeat purchases, time is needed to observe actual repeat purchases and cumulative contribution margins per customer. Rather than pre-reflecting expected repeat purchases as if they were already secured profits, managing observed orders and yet-unrealized orders separately is rational.

Even with high customer retention rates, if provisioning costs continue to rise, the profit and loss of subscription-based products may not improve. Conversely, if standardization capable of reducing support time while maintaining usage value is achieved, room remains to improve unit economics per customer without price cuts. Therefore, when determining subscription prices, it is necessary to connect not only payment amounts and churn rates, but also provisioning frequency, inquiry processing times, refunds, and handling costs following payment failures. In effect, the unit of service provision becomes the center of calculation instead of the per-item cost of goods.

Inserting Target Profit Changes Pricing Choices

Surpassing the break-even point and securing required profits are separate objectives. Under the previous conditions of a 90,000-won price, 60,000-won unit variable cost, and 4 million-won monthly fixed cost, targeting a monthly profit of 2 million won requires a contribution margin of 6 million won. Dividing this by 30,000 won per unit yields a required sales volume of 200 units. Achieving the break-even quantity of 134 units cannot be evaluated as securing target profits as well, and it is clearer to display the quantity avoiding deficits alongside the quantity generating target profits side by side in plans.

The magnitude of the discount itself can also be compared across multiple alternatives. Lowering the price by only 5% to 95,000 won under the same cost conditions results in a contribution margin of 35,000 won per unit and a required integer sales volume of 115 units for break-even. Compared to 134 units at a 10% discount, this reveals that required volumes vary depending on price choices. Which alternative generates more actual orders is the subject of separate testing, and calculation tables alone cannot determine customer responses.

Alternatives for cost improvement can also be evaluated in the same table. If maintaining the selling price at 90,000 won while lowering unit variable costs to 55,000 won through packaging or process modifications is possible, the contribution margin is 35,000 won. However, if separate equipment or design expenses must be invested for this, savings effects alone must not be compared while excluding those expenditures. Because changes in quality or service scope must also be reviewed concurrently, cost improvement is a task for confirming execution conditions rather than an assumption that numerically erases the losses of price reductions.

The difference between profit/loss and cash flow also remains. If raw materials are purchased before selling products and payments are collected from customers later, immediate cash requirements may grow even if profitable orders increase. Conversely, items like depreciation do not coincide cash outflows and expense recognition for that period. When determining the scale of a discount promotion, payment and collection schedules must be reviewed separately from contribution margin calculations to avoid situations where volumes feasible on a profit-and-loss basis cannot be provided due to cash shortages.

Discount Approval Documents Should Contain More Than Just Percentages

The discount review table proposed by KBR is a method placing normal prices, discounted prices, unit variable costs, contribution margins, required additional sales volumes, and processable quantities on a single screen. Alongside these, separate advertising expenses, operating expenses, and refund periods to check after the promotion ends can be attached. Instead of having departments explain sales increases and operational burdens separately, this forces profits and losses to be calculated under identical conditions. Rather than stuffing in numerous numbers, the significance lies in not omitting items that actually change together when prices are altered.

Establishing termination conditions for promotions prior to commencement also helps steady judgments. Not only situations where sales volume falls short of targets, but also situations where contribution margins are lower than expected or order processing delays accumulate can become reasons for discontinuation or modification. Criteria must be established to fit a company's cost structure and provisioning capabilities without needing to adopt external universal success figures wholesale. This is a mechanism to avoid expanding promotions whose profitability has not been verified simply because sales velocity improved.

Alternatives altering purchase conditions while maintaining prices can also be compared. Methods adjusting what customers receive and what companies provide together—such as basic types with clear service scopes, order conditions bundling shipping, or product configurations according to delivery date selections—are available. However, hiding and excluding essential services previously included merely to make offers look like benefits can distort customer judgments. Being able to compare prices and provisioning scopes transparently creates room for cost reductions to lead into sustainable relationships.

After a promotion concludes, contrasting results against the planning table using identical criteria is important. Separating expected sales volume at the time of order reception from final confirmed sales after reflecting refunds, and separately displaying unplanned packaging, outsourcing, or customer support costs, allows identification of where discrepancies occurred. Because the reasons for selling better than expected and retaining less than expected may differ, it is better not to combine the two questions into one. What is needed for subsequent pricing decisions is a record of repeatable conditions rather than evaluations of success or failure.

Discounts are an option for testing demand or clearing inventory, but they do not constitute a growth strategy in themselves. They become management decisions only when one can explain how much more must be sold after lowering prices, whether those volumes can actually be supplied, and what remains after sales conclude. The habit of looking at contribution margin structures before the magnitude of sales growth is not an argument to unconditionally raise prices. It is a basic calculation asking whether companies can sustainably absorb the prices presented to customers.