Discount schemes that don't eat your margin

The best discount scheme for a retail shop in India is the one you have costed first. Bundles work for clearing slow stock with a fast seller, slab schemes reward bigger baskets without discounting the first unit, and free-goods schemes look generous but cost you at purchase price, not selling price. Work out the margin left after the scheme on paper, in rupees, before a customer ever sees the offer.

Why do most discount schemes lose money?

Because the shop owner looks at the discount and not at the margin. A 10% discount on an item that earns you 20% does not cut your profit by a tenth. It cuts it by half. You now have to sell twice the units to earn the same rupees.

The second reason is that schemes get given to customers who would have bought anyway. The regular party who always buys five boxes now gets a discount on the same five boxes. That is margin handed over for nothing.

So every scheme below is costed the same way: what you earn per sale without the scheme, what you earn with it, and how many more sales you need to break even.

How do I cost a scheme before offering it?

Use three numbers for each item: selling price, purchase cost and your normal gross margin in rupees. Then answer one question:

Extra units needed to break even = profit lost on scheme sales ÷ profit per extra unit sold under the scheme

If that number looks unrealistic for your shop, drop the scheme or change it. All numbers in the examples below are illustrative, chosen to make the arithmetic easy to follow. Use your own purchase costs.

How does a bundle scheme work, and what does it cost?

A bundle sells two or more items together at one price, below their separate total. It works best when you pair a fast seller with a slow one, so the bundle moves stock that would otherwise sit in the godown.

Worked example (illustrative figures):

• Item A, a fast seller: sells at ₹200, costs you ₹150, margin ₹50
• Item B, a slow mover: sells at ₹100, costs you ₹60, margin ₹40
• Separate total: ₹300, combined margin ₹90
• Bundle price: ₹270

Margin on the bundle = ₹270 − (₹150 + ₹60) = ₹60

You have given up ₹30 compared with selling both at full price. But the real question is whether Item B would have sold at all. If B was sitting unsold, the fair comparison is selling A alone for ₹50 margin, against the bundle for ₹60. Seen that way, the bundle earns ₹10 more per sale and clears a slow item.

The risk: if customers who would have bought both items anyway take the bundle, you lose ₹30 on each of those sales. Bundle a slow item with a fast one, not two items people already buy together.

How does a slab scheme work, and what does it cost?

A slab scheme gives a better rate once the customer crosses a quantity or bill value. "Buy 1 to 4 at the normal price, 5 or more at 5% off" is a slab. It is the scheme distributors use most, and it suits retail too, because the first units are sold at full margin.

Worked example (illustrative figures):

• Selling price ₹100, purchase cost ₹75, margin ₹25 per unit
• Slab: 5% off every unit when the customer buys 5 or more

Units bought	Revenue	Cost	Margin	Margin per unit
4 at full price	₹400	₹300	₹100	₹25.00
5 at slab price	₹475	₹375	₹100	₹20.00
6 at slab price	₹570	₹450	₹120	₹20.00

Notice the 5-unit row: the customer buys one more, and you earn exactly what you earned on four. The scheme only starts paying from the sixth unit. If most customers stop at five, you have moved more stock for zero extra profit.

Two ways to tighten it: apply the discount only to units above the slab, not all units, or set the slab where it pushes the typical basket up by two or more units, not one. Look at your sales bills to find where most baskets stop today.

How does a free-goods scheme work, and what does it cost?

Free goods means "buy 10, get 1 free" or "buy a pack, get a small item free". Customers like it because it feels like getting something, not paying less.

The cost trap: the free unit costs you its purchase price, but customers value it at selling price. That gap is why free goods can look generous while costing less than a cash discount of the same face value. It is also why it can quietly cost more than you think when the free item is expensive to buy.

Worked example (illustrative figures):

• Selling price ₹50, purchase cost ₹40, margin ₹10 per unit
• Scheme: buy 10, get 1 free

Without the scheme: 10 units, margin ₹100. With the scheme: revenue ₹500, cost of 11 units ₹440, margin ₹60.

The free unit cost you ₹40, which is 40% of the margin on the whole purchase. To earn back that ₹40 you need four extra full-price units sold because of the scheme. The equivalent cash discount, by the customer's view, is ₹50 off ₹550 of goods, about 9%. By your costing it is ₹40 off your ₹100 margin.

If the free item is a different, cheaper product (a sample pack, a small accessory), the cost drops sharply. That is usually the better version for a shop.

Which scheme should I choose?

Scheme	Best for	What it costs you	Main risk
Bundle	Clearing slow stock alongside a fast seller	Discount on the combined margin	Discounting items customers already buy together
Slab	Raising basket size on high-margin items	Discount on every unit once the slab is crossed	Customers stop exactly at the slab
Free goods	Repeat-buy consumables; launching a new item	Purchase cost of the free unit	Expensive free item wipes out the margin
Flat cash discount	Short clearance of dead stock	Discount straight off margin	Becomes the price customers expect

A rough rule: choose the scheme whose cost lands on margin you would have lost anyway, such as slow stock, near-expiry stock or units that would not have sold.

Common mistakes with discount schemes

• Costing at selling price. Always cost free goods and bundles at purchase price, the rupees you actually paid.
• No end date. A scheme without an end date becomes your new price. Print the closing date on the offer.
• Stacking schemes. A slab plus a bundle plus a free item on the same bill can push margin below zero. Decide in advance which schemes combine.
• Not tracking scheme stock. Free units leave the shop without a sale. If they are not recorded, your stock count will not match and you will reorder wrongly. Our guide to wholesale and distributor inventory covers recording scheme quantities against stock.
• Ignoring the supplier's scheme. If your distributor gives you a free-goods scheme, your real purchase cost per unit is lower. Use that lower cost when you cost your own offer, but only for the units it covers.

When does a discount scheme not make sense?

Skip schemes on items with a thin margin, where even a small discount turns the sale into a loss. Skip them on items that are already short in supply, since you will run out sooner and pay more to restock. And for dated goods, a scheme to clear stock close to expiry is fine, but fix the cause too: see FIFO, LIFO and FEFO explained and the reorder point formula so the excess does not build up again.

The GST treatment of free goods, bundles and discounts is outside this guide. It depends on how each scheme is structured and documented, so speak to your CA before launch.

FAQ

Which discount scheme is safest for a small retail shop? A slab scheme on items with a healthy margin is usually the safest. The reward only applies once the customer has bought more, so you never give away margin on a sale you would have made anyway. Work out the cost at each slab before you print the offer, and cap how many slabs you run.

How do I know if a scheme is making money? Compare gross profit during the scheme with gross profit for the same items over a normal period of the same length. If total rupee profit went up, the scheme worked. If it only moved more units at a thinner margin, it did not. Count leftover free goods and slow stock you cleared, too.

How is GST handled on free goods and bundles? This guide does not cover it. How free goods, bundles and discounts are treated for GST and input tax credit depends on how the scheme is structured and documented, and the rules can change. Ask your CA before you launch a scheme, and check the current position on the official GST portal.

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Related reading: Inventory for wholesalers and distributors, the reorder point formula and Excel vs inventory software.