What a 20% discount really costs you

Discounting feels like a lever with a small cost and a big effect. The cost is much larger than it looks, and the effect is usually smaller, because the arithmetic works on your margin rather than on your price.

The number that matters

Take a £50 service where £20 goes on the direct costs of delivering it. Product, the share of wages for that hour, card fee, laundry, whatever it genuinely is. That leaves £30 of contribution.

Knock 20% off the price and you sell it at £40. Your costs did not move, so you have £20 of contribution left. The price fell by a fifth. The contribution fell by a third.

Now try a business with tighter costs. A £50 service with £30 of direct cost has £20 of contribution. The same 20% discount leaves £10. Half the margin, gone, in exchange for a discount most customers describe as modest.

How many extra bookings you need

This is the question nobody asks before running the offer. In the first example, going from £30 to £20 of contribution means you need 50% more bookings just to stand still.

In the second, going from £20 to £10 means you need to double your volume to break even. Not to profit. To break even, on a day that is now twice as busy, twice as tiring and needs the same staff.

If your offer is going to a list of existing customers who were going to book anyway, the extra volume is zero and the discount is a straight transfer out of your pocket.

The part that outlasts the offer

Price is a signal. A service discounted regularly is telling people its real price is the discounted one, and they will simply wait for the next round. Businesses that run a January offer every January have trained their client base to book in January.

Discounts also select for the customer you want least. The person who comes for 20% off is, on average, less likely to rebook at full price, more likely to no show and more likely to leave for the next offer. You are paying to acquire your least loyal customers.

Things that work better than cutting the price

• Add value instead of subtracting price. A treatment, an upgrade or a longer consultation costs you your marginal cost rather than your margin, and it does not reset anybody's idea of what you charge.
• Discount time, not service. Ten per cent off Tuesday mornings fills the hours you cannot sell and leaves Saturday untouched. That is yield management rather than a sale.
• Bundle forwards. Three sessions prepaid at a small saving brings cash in, locks in the next two visits and costs you far less per booking than a straight discount.
• Reward the behaviour you want. Money off the next visit when they rebook before leaving beats money off this one, because it buys retention rather than a transaction.
• Use referral credit. It costs you a discount only when it brings somebody new, which is the only version of a discount that reliably pays for itself.

When a discount is genuinely right

To clear perishable capacity today, because an empty chair at three o'clock is worth nothing at four. To open a new location or a new stylist's column where the goal is filling a diary fast. To recover a client after something went wrong.

All three have an end date and a specific job. If your offer has neither, it is not a promotion. It is a price cut you have not admitted to yet.