Assume a price of RON 1,000 and a direct cost of RON 700. Gross profit is RON 300 and the gross margin is 30% of the price.
A 10% discount reduces the price to RON 900. If the cost stays at RON 700, gross profit falls to RON 200 and the gross margin to approximately 22.2%. In this example, a 10% price cut reduces gross profit by one third.
Before approving a discount, review the cost basis and commercial terms. This illustrative example excludes other expenses and taxes.
Educational explanation. Examples are illustrative.