Technically a wasted discount in retail is a discount that you give for an item that you would have sold without the discount because consumers would have bought the products at a total price so the discounts didn’t generate extra sales or volumes. This is a big problem in loyalty marketing as the first ones, in general, to take advantage of discounts are the regular customers the business has.
So with this in mind, a well-known management company Nielsen Pacific, looked at the food and grocery marketing in Australia, which is worth about $51 billion a year. They estimated that about 38% of all products sold this year were discounted, and of that, about 20% of the total discounts were wasted.
Reading their report I decided to do a calculation of the effect of discounting, particularly just how much extra one would have to sell to generate the loss of income due to the discount. Now I will do the calculation without GST as it changes nothing here.
So let us imagine you are selling 100 of a product a month at $1 with a margin of 30%.
Turnover = $100
Cost = $70
Profit = $30
Now say you give a discount of 10%; what you need to do is now sell 150 products as your turnover is 150 x $1 x (1-10%) = $135. Your cost is 150 x $1 x (1-30%) = $105. Your profit is $135 - $105 = $30. So you have had to sell 50% more for the same profit without a discount.
In reality, you will need more as handling costs, storage costs, display costs, etc, will be more, too but let us leave that point for another day's discussion.
Now if I do the same calculation for a discount of 15%, you have to sell 200 products or 100% more to get the same profit before the discount was issued.
So I decided to make a graph of what it looks like, which I think you will find interesting.
The blue line is for a product with a 25% margin, the red line is for a product with a 30% margin, and the green line is for a product with a 50% margin.
As you can see, the low-margin products are much more affected by discounting, but even here once you start hitting a 15% discount a product with a 50% margin, needs a lot more sales to justify the deduction.
As a rule of thumb in retail, every 1% discount needs at least a 3% increase in turnover to break even.
This is why wasted discounts in loyalty marketing are a big issue.
If you want to know what your discounts are, check your end-of-day reports.