A thoughtful discount depth is crucial to the success of any promotion. Too high a promo discount hurts your margin, while too modest a discount percentage misses sales. In this article, you will learn how to calculate the ideal discount step by step so that your campaign pays off and convinces customers to buy.
What is discount depth?
Discount depth, also called discount level, indicates how much discount you are offering compared to the normal selling price. You can express this as an absolute amount (e.g. €20 discount on €100) or as a relative discount as a percentage (20% discount). The discount margin shows the difference between purchase price and selling price after discount. Suppose a product costs €80 in purchase and you offer a promo discount of 20% on the recommended retail price of €100. Then you pay the customer €80, making you break even and your margin zero.
Why is the right discount depth important?
Determining the optimal discount depth is essential to protect your profitability while boosting customer satisfaction. Too heavy a discount can completely eat up your margin, while too low a promo discount does not stimulate demand enough. Consumers perceive a higher quality image with modest discount levels, but may become sceptical with extreme discounts. Moreover, under-discounting can mean missing your sales target, while over-discounting leads to loss of profits, long-term price erosion and affect your brand reputation.
Key factors in determining your discount
When determining discount levels, four key factors are essential. First, purchasing and production costs form the basis: your minimum discount margin should not fall below your cost price. Second, a thorough competitive and market benchmark is needed; analyse what promo discount and discount rate are common among rivals. Third, your action objectives (such as volume growth, market penetration or stock clearance) determine how much discount you can provide. Finally, price elasticity (the degree of price sensitivity among customers) plays a crucial role in matching the discount to consumer behaviour. By weighing these factors together, you can calculate discount depth and determine your promotional discount with data-driven certainty.
Methods to calculate discount depths
There are three main methods to calculate discount depth: margin-based calculation, turnover/volume-based method and elasticity analysis.
- Margin-based (break-even + desired margin): determine your minimum discount level by calculating break-even and adding your desired profit mark-up.
- Turnover/volume-based (ROI scenarios): use simulations to see what discount is needed to achieve, say, 15% extra sales volume.
- Elasticity analysis: measure price elasticity discounting via A/B testing to determine which discount rate yields the highest return.
In this example, we calculate how a 25% discount rate affects margin and sales volume, so you can immediately see which discount rate is optimal.
Do your own calculation below!
Promo Discount Formulas & Scenarios
P = €100, C = €60, M = 20%
Dmax = (100 − 60 × 1.2) / 100 = −0.32
→ Unfeasible
DBE = (100 − 60) / 100 = 40%
P = €100, V = 100, ΔV = 20%, revenue target = €11,000
(1−D) × 100 × 100 × 1.2 = 11,000
→ D ≈ 8.3%
ε = 1.5
Desired ΔV = 30%
D = 0.30 / 1.5 = 20%
Discount Depth Calculator
Want free advice on how to optimize your campaign setup? Click here to schedule a short call
Practical tips & pitfalls
To optimise your discount levels, keep an eye on the following tips and pitfalls. First: run A/B tests (or split tests) on different discount levels to discover which promo discount performs best. Secondly, monitor in real-time (adjust live) crucial KPIs such as sales, conversion and fraud patterns so that you intervene in time in case of deviations. Finally, be flexible and dynamically adjust your discount strategy based on interim results and market fluctuations, so you are never stuck with a sub-optimal discount level.
How Direct Converter helps
Direct Converter offers a powerful solution to optimise your promotional discounts in an automated and data-driven way. First, its real-time price steering (dynamic price steering) and smart data integration ensures that discounts are automatically adjusted based on current sales, conversion and market data, while keeping your margin protected. In addition, the platform delivers optimised landing pages with A/B-tested designs and personalised offers, significantly improving your conversion rate. Robust fraud prevention filters suspicious orders and BOT attacks, keeping your promo discount safe and profitable. A clear dashboard allows you to see your discount rate, inventory status and campaign performance at a glance and make adjustments immediately. In practice, one retailer saw a 15% increase in sales and an 8% increase in profits during a discount campaign thanks to Direct Converter.
How does it work?
Want to experience for yourself how Direct Converter increases your optimisation power? Schedule a free demo today
View example
Want to see a sample page of the Direct Converter? We've created one for you. Click below
Frequently asked questions about Discount Depth Determination
1) Margin-based: calculate your break-even and desired margin.
2) Volume-based: simulate what discount percentage is needed to meet your sales target.
3) Elasticity analysis: use A/B testing to measure the effect of discounting on sales volume.
These methods help to understand what pays off.
