Granting a 10% discount does not always cut the margin by 10%. With a product bought at €6 and sold at €10 excl. VAT, the unit margin goes from €4 to €3: a fall of 25%. This calculation deserves a place in the preparation of every offer.
Margin, mark-up and gross margin rate: write down the denominator
In this guide’s examples, the trading margin is the selling price excl. VAT net of reductions, minus the purchase cost excl. VAT of the goods sold. The purchase cost used here includes the costs needed to make the goods available. For a manufacturer, use the relevant cost of goods and name the resulting balance: it is not automatically the accounting trading margin of a distributor.
| Measure | Calculation | Result |
|---|---|---|
| Unit margin | €10 − €6 | €4 |
| Mark-up on purchase cost | €4 ÷ €6 × 100 | 66.7% |
| Gross margin rate on selling price | €4 ÷ €10 × 100 | 40% |
The definition of the gross margin rate given by Bpifrance Création (French) does use the selling price as the denominator. In a quote or a sales sheet, write “margin / net revenue excl. VAT” or “margin / purchase cost”: that precision avoids an argument about two percentages that measure different things.
Measure what a discount actually removes
Keep the product sold at €10 excl. VAT and costing €6. A 10% discount lowers its price to €9. The unit margin becomes €3 and the gross margin rate 33.3%. To recover the €400 of margin obtained from 100 units at the list price, you have to sell 400 ÷ 3, that is at least 134 units at the discounted price, on these assumptions alone.
Two successive discounts do not add up
A 10% reduction, followed by 5% on the already reduced price, gives 10 × 0.90 × 0.95 = €8.55. The total reduction is 14.5%, not 15%. State whether the benefits combine, on what base and in what order. An amount calculated on the whole invoice can also differ from the sum of the amounts rounded line by line.
Include free units in the cost of the deal
A “buy 10, get 2 free” offer at €10 excl. VAT invoices €100 for 12 units delivered. The average price invoiced per unit is therefore €8.33. With a unit cost of €6, the cost of the twelve units is €72 and the margin on the deal €28, before other expenses.
The customer receives 20% more units than the ten bought. Yet the equivalent reduction on twelve units at the normal price is 16.7%: €20 of benefit for a catalogue value of €120. Saying “20% discount” would describe a different mechanism. For testers and POS displays, the guide to asilage helps to separate commercial free goods from product intended for resale.
From product margin to the contribution of an order
Product margin does not pay fixed costs directly: the variable costs of the sale come first. Build a second line that deducts, depending on your model, commission, transport not recharged, picking, packaging and payment fees. Call it “contribution after variable costs” and document its scope.
| Item | Amount | Assumption |
|---|---|---|
| Net revenue | €500 | After discount, excl. VAT |
| Cost of goods | €300 | Quantities actually delivered |
| Commission | €40 | 8% of net revenue, under the fictional contract |
| Picking and transport | €25 | A single shipment |
| Contribution | €135 | 500 − 300 − 40 − 25, that is 27% of revenue |
A later credit note of €50 cannot be handled without looking at its cause. A rebate without a return reduces revenue, whereas a resaleable return can also put stock back. Commissions may be adjusted under the contract. Keep the link between order, invoice and credit note so that you do not compare net revenue with costs that have stayed gross.
Net revenue500 euros
- Cost of goods300 euros
- Commission40 euros
- Picking and transport25 euros
- Contribution135 euros
The €135 is a contribution before fixed costs, with a single shipment and no later credit note.
Give reps rules they can use
- →A documented floor price: product, customer, validity period and the costs included.
- →A combination matrix: contractual discount, promotion, free units and the free-shipping threshold, with the exceptions allowed.
- →A named approval: owner, reason and duration of a derogation, visible to the sales admin team.
- →A measurement after the fact: the contribution actually obtained after deliveries, credit notes and known costs.
Test these rules on three baskets: the usual order, a small reorder and a large opening order. The free-shipping threshold calculation completes this picture. A discount that is acceptable on a pallet can become expensive on three separate cartons; the software must show that difference before the order is confirmed, with assumptions the team understands.
By Anatole Briant
By Anatole Briant
By Pierre Lerebours
CEO of Salesia
Anatole Briant is CEO of Salesia. He is your contact for demonstrations, pricing and partnerships.