With variable costs unchanged, a discount reduces each unit’s contribution toward fixed costs and profit. Before launching a promotion, calculate how much you need to sell to offset this reduction and the promotion’s additional costs.
The required sales volume is a calculated threshold. Assess whether it is achievable separately using sales history, stock levels, prices, and the results of previous promotions. These data help check expectations but do not guarantee future results.
Calculate the contribution per unit at both prices
Contribution per unit = selling price − variable cost per unit.
This is the amount available to cover fixed costs and generate profit. To calculate it, include your store’s costs related to the sale:
- cost of the goods;
- order fulfillment;
- delivery and packaging;
- payment processing fees;
- marketing costs tied to the sale.
Calculate the contribution separately at the regular and promotional prices. Use the relevant variable costs for each scenario. If they remain unchanged, the contribution per unit decreases by the amount of the discount.
Establish the baseline result without a promotion
Review the item’s sales history at the regular price. Determine the typical sales volume over a period of the same duration as the planned promotion.
Baseline total contribution = number of units sold without a promotion × contribution per unit at the regular price.
Compare the contribution from promotional sales, after deducting the promotion’s additional costs, with this amount.
Calculate the sales volume needed to maintain the result
The calculation below follows from the definition of contribution per unit. It applies to one item and two scenarios over periods of equal duration.
Within each scenario, the price and variable cost per unit must be constant. They may differ between scenarios. Fixed costs are assumed to be unchanged across the periods being compared. Additional promotion costs that do not depend on the number of sales are accounted for separately.
- Q₀ — baseline number of units sold without a promotion.
- Q₁ — number of units sold during the promotion.
- M₀ — contribution per unit at the regular price.
- M₁ — contribution per unit at the promotional price.
- A — additional promotion costs for this period that do not depend on the number of sales and are not included in variable cost per unit; A ≥ 0.
To ensure that contribution after deducting the promotion’s additional costs is at least as high as the baseline, this condition must be met:
Q₁ × M₁ − A ≥ Q₀ × M₀.
Add A to both sides of the inequality. If M₁ > 0, divide both sides by M₁:
Q₁ ≥ (Q₀ × M₀ + A) / M₁.
For indivisible units, round the resulting threshold up to the next whole number. The difference between this threshold and Q₀ shows the required change in sales volume.
If actual volume is below the threshold, this item’s result after the promotion’s additional costs will be below the baseline. With fixed costs and the results of all other sales unchanged, this means a decrease in profit.
If M₁ is zero or negative, increasing sales volume will not restore a positive baseline contribution under this model.
The calculation defines the condition for maintaining the result under the stated assumptions. It does not determine how much customers will buy.
Check whether the required volume is achievable
Gather sales history along with data on stock levels, prices, and previous promotions. Compare the calculated threshold with the volumes your store actually sold over comparable periods. Take into account the prices and stock levels under which those results were achieved.
If you prepare a forecast, check it against historical data: calculate expected sales for a test period and compare them with actual sales. This check shows how the forecast differs from past results. It does not prove that the required volume will be reached during a future promotion.
Assess storage costs separately for stock
Storage costs include warehousing and interest costs, as well as losses from damage and product aging. Determine them using your store’s own data.
Check your contracts and rates to see which costs will actually decrease if the item is sold earlier. If a fee depends on the average daily stock volume, it is affected by both the volume and the storage duration. Whether this calculation applies depends on your rate.
Do not count as savings costs that will remain unchanged after the sale. Storage costs alone are not enough to determine a profitable discount. Comparing a sale now with a sale later also requires your own assumptions about future price, demand, and time to sale.
Check the promotion’s actual result
After the promotion ends, use the actual number of units sold, actual contribution per unit, and the promotion’s additional costs:
Promotion result for comparison = Q₁ × M₁ − A.
Compare it with Q₀ × M₀. If the price or variable costs differed across sales during the promotion, total the actual contributions from individual sales and subtract A. Do not use planned contribution as actual contribution.
This shows whether the volume sold offset the reduced contribution per unit and the promotion’s additional costs within the chosen comparison.
How to identify slow-moving stock in Torgsoft
Before assessing a clearance sale, identify items that have been in stock for a long time. In Torgsoft, “Dead Stock Analysis” helps identify such items. Calculate the contribution at the proposed price separately for each one, and check its storage costs.
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