The hidden cost of discounts: Why 60% of promotions destroy profit

Many companies see discounts as a way to attract customers and boost sales. A 10% discount might feel small to the customer, but the real financial impact on the company is often much bigger than expected.

Research from firms like McKinsey and Bain shows that over 60% of promotions actually destroy value. Globally, discounts are estimated to cut profits by 3-10%.

So, why do discounts hurt so much? Let’s break it down.

1. Discounts cut margins more than we realize

Imagine you sell a product for €100 with a 30% profit margin. That means you earn €30 profit per sale.

Now apply a 10% discount:

  • New sales price = €90
  • Cost of goods remains the same ( at €70)
  • New profit = €90 – 70 = €20

A 10% discount, lowers profit from €30 to €20: That’s a 33% drop in profit.

To achieve a break even on profit, you would now need to sell 1.5 products instead of 1: meaning a 50% increase in sales.
In reality, very few sales teams can guarantee 50% more sales just because they gave a 10% discount.

2. Discounts don’t always drive extra sales

Another mistake companies make is assuming all sales during a promotion are caused by the discount.

For example, I once ran a campaign offering upgrades with a discount. The conversion looked amazing: many customers upgraded. But when we checked the overall numbers, upgrades stayed flat. Why?

Because we gave discounts to people who would have upgraded anyway, with or without the promotion. In other words, we gave away margin for nothing.

This is why it’s crucial to always compare results with a control group (sales without the promo).

How to Make Promotions Work Better

  1. Smarter Targeting

Avoid giving discounts to customers who are happy to pay full price. Instead, use customer data (like Frequency, Recency, Monetary (RFM) models) to:

  • Encourage customers to come back more often
  • Push them to spend more (e.g., discounts for bigger top-ups)
  • Cross-sell products they haven’t tried yet
  1. Use Alternatives to Discounts

Not every promotion needs to be a price cut. Other incentives can protect margins while still boosting sales:

  • Freebies that encourage cross-sell
  • Volume deals (e.g., buy 2 get 1 free)
  • Loyalty programs that reward repeat purchases
  1. Better Measurement

Track the real impact of promotions, not just click-throughs or short-term sales:

  • Always use control groups to measure true uplift
  • Track additional revenue, margin, and discount costs
  • Look at long-term effects, like:
    • Whether loss on one product is offset by others in the basket
    • Whether customer retention improves
  • Regularly cut or adjust discounts with a negative ROI
  • Incentivize teams based on margin, not just sales volume

Conclusion

Promotions can help sales, but they often damage profit margins if used blindly. The key is to understand their true impact on revenue and profitability. With the right data and smarter strategies, discounts can be reshaped into tools that drive real, sustainable growth.

How Hyperson Can Help

I’d love to hear about your experience on this topic. Did this article raise any red flags for you? At Hyperson, we work every day on improving campaign and discount performance:

  • We know creating ROI-positive campaigns takes real effort.

  • We know measuring campaign ROI is a major challenge (which may explain why 60% of campaigns end up ROI-negative).

Let’s grab a coffee and chat about how we can help you turn discounts into ROI-positive growth.

About the author

Matej is a Customer value expert with 20 years of experience in marketing, CRM, and strategy. He uncovers the potential value in the customer base and help buildgin a transformation roadmap to unlock the potential.

He is founding partner at Hyperson

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