How to use the discount to keep margin calculator
- Enter your current price and your cost per unit.
- Enter the lowest margin you accept, as a percent of the selling price.
- Read the lowest price that still leaves that margin and the largest discount you can give from the current price.
- If the answer says none is available, your current margin is already at or below the target.
Formula
Lowest price = cost / (1 - target margin)
Largest discount = 1 - lowest price / current price
Margin = (price - cost) / price
Margin here is profit divided by the selling price, not by cost. A 20% margin means that cost is 80% of the price.
Price $100, cost $60, a 20% margin floor
A product sells for $100 and costs $60, which is a 40% margin today. To keep at least a 20% margin the price must be at least $60 / (1 - 0.20) = $75.00.
The largest discount is 1 - $75 / $100 = 25%, or $25.00 off. Check: at $75 the profit is $15, and $15 / $75 is 20%.
Margin and markup are different
A margin is measured against the selling price and a markup against the cost. A product bought for $60 and sold for $75 has a 20% margin and a 25% markup. If you want a floor expressed in markup terms, convert it first with the markup calculator or check the pair with the profit margin calculator.
Mixing the two is a common source of mispriced discounts, which is why the formula is written out above.
Using the floor in practice
The lowest price is a limit, not a recommendation. Give the discount that makes commercial sense, and use this figure to make sure you never go below the margin you decided to protect. It is also a useful number to give a sales team that can offer discounts on its own.
The calculation treats the cost per unit as the whole cost. If shipping, payment fees or returns apply to each sale, add them to the cost first. To see how much extra volume a discount would need, use the discount profit impact calculator.
Assumptions and limits
- The cost per unit includes every cost you want the margin to cover.
- The target margin is a percent of the selling price.
- The tool rounds the lowest price to the cent for display.
- Volume, competition and customer demand are not part of the calculation.
Frequently asked questions
How do I find the maximum discount I can give?
Work out the lowest price that keeps your target margin by dividing cost by one minus the margin. Then compare it with your current price. For a $60 cost and a 20% target the lowest price is $75.
What if my target margin is higher than my current margin?
Then no discount keeps the target. The lowest price is above the current price, and the tool says that no discount is available.
Is margin the same as markup?
No. Margin divides profit by the selling price, while markup divides profit by the cost. The same sale can show a 20% margin and a 25% markup.
Can the target margin be zero?
Yes. A zero percent margin means selling at cost, so the largest discount is the full gap between price and cost. At a $60 cost and a $100 price that is 40%.