Is a volume discount worth it? How to do the margin math

1 Think in gross profit, not revenue

A discount doesn't take 10% of your profit, it takes 10% of the price. And all of that comes out of your gross profit.

Example: a product sells for $20, you buy it for $12. You keep $8, a 40% margin. At 10% off you sell it for $18 and keep $6. The price drops by a tenth, your gross profit by a quarter.

2 The formula: discount divided by margin minus discount

How many more units you need to sell to keep the same gross profit comes from one simple calculation: discount ÷ (margin − discount). At a 40% margin and 10% off that is 10 ÷ 30, so about 33% more units. It is standard pricing math, set out for example in CFO Magazine.

The table shows how fast that grows. With a thin margin, a big discount eats most of your gross profit.

3 A tier is not a discount on everything

This is the difference from a store-wide percentage off: with a tier, a customer who buys one unit pays full price. The discount only costs you on orders that reach the threshold.

So the real question is: how many of your customers would have bought three anyway? Every customer who goes from one to three units because of the tier brings you $10 more gross profit in the example ($18 instead of $8). Every one who would have taken three anyway costs you $6 ($18 instead of $24).

4 Count the costs per order

Packaging, shipping and payment fees come per order, not per unit. Card fees usually include a fixed amount per transaction; on Shopify Payments it's a percentage plus a fixed fee that depends on your country and plan. Say everything together comes to $4.50 per order: an order with one unit then brings $3.50, one with three units at 10% off brings $13.50.

The higher your fixed costs per package, the sooner a tier pays off. For heavy or bulky goods that is often the strongest reason for one.

5 Put the first tier just above what people buy today

Look at your orders from the last few weeks. If a typical customer buys one unit, the first tier sits at two or three. If many already buy two, start at three. A tier almost everyone reaches anyway is just a price cut. But don't set it too high either: a study of multi-unit promotions in retail found that the required quantity was often too high to get shoppers to buy more.

Two or three tiers are usually enough. More than that gets hard to read on a product page.

6 Show the savings where the decision happens

A tier the shopper only notices at checkout no longer changes the decision. It belongs on the product page, with the price per unit for each quantity. Then they see what each unit costs when they buy three or more, before adding to cart.

7 Check what happened after four weeks

Compare two periods: units per order, gross profit per order and the number of orders. If your total gross profit goes up, the tier pays off. If only the units go up while total gross profit falls, the tier is too low or the discount too high.

To run the numbers for your store, use the tiered discount calculator. It works out unit price, margin and the extra units needed per tier, to the cent like Shopify's checkout.