Discounts are important in pricing, with one study finding that more than 81% of ecommerce SMS and push notifications from major retailers offered them. A discount is a price reduction that can influence how customers perceive value, how revenue flows through a business, and how pricing decisions compound over time.

Below, we explain what a discount means in pricing, how different types of discounts work, and how to offer discounts without undermining long-term value.

What’s in this article?

• What does discount mean for pricing, margins, and growth?
  
• Why do businesses offer discounts?
  
• How do discounts affect the final price?
  
• What are common types of discounts?
  
• How do percentage discounts work?
  
• What is a volume discount, and when is it used?
  
• What should businesses consider before offering a discount?
  
• How Stripe Payments can help
  

What does discount mean for pricing, margins, and growth?

In pricing, a discount is a price reduction from the standard (or list) price for a product or service. Discounts are typically expressed as a percentage off, but they can also be a fixed amount. They change the price a customer pays relative to what they would normally expect to pay.

Why do businesses offer discounts?

Businesses use discounts to solve specific problems or create specific outcomes, often tied to growth, cash flow, or customer behavior.

Here’s what discounts can help with:

• Stimulating short-term demand: Discounts encourage purchases by giving a reason to buy now rather than later. This is useful during seasonal slowdowns, around reporting deadlines, or when launching a new product that needs early traction.

• Managing inventory and capacity: When products are overstocked, aging, seasonal, or close to obsolescence, discounts help convert idle inventory into cash. The same logic applies to unused capacity, such as off-peak services or underused subscriptions.

• Improving cash flow: In business-to-business (B2B) settings, discounts are often used to encourage faster payment rather than higher volume (e.g.,, offering a small price reduction for paying an invoice early).

• Increasing average purchase size: Threshold-based discounts, bundles, or minimum-order incentives encourage customers to spend more per transaction.

• Retaining and rewarding customers: Targeted discounts can reinforce loyalty, reduce churn, or reward long-term relationships without lowering prices for everyone.

• Staying competitive: In crowded markets, discounts can help a business stay visible or neutralize a competitor’s promotion.

• Shaping customer behavior: Discounts can steer customers toward preferred actions, such as annual commitments, self-serve onboarding, off-peak usage, or higher-margin products.

• Learning about pricing sensitivity: Temporary discounts can reveal how demand responds to price changes, which helps businesses understand price elasticity without permanently lowering prices.

How do discounts affect the final price?

Discounts have different results depending on how they compound, how they’re presented to customers, and how they change the economics of a sale.

Here’s how they affect the final price:

• Direct price reduction: A discount lowers the amount the customer pays relative to the list price. Percentage discounts scale with price, while fixed discounts subtract the same amount regardless of price.

• Compounding: Multiple discounts are usually calculated sequentially, not added together. This means two smaller discounts rarely equal one larger discount, even if the percentages look similar.

• Revenue and margin: Unless a lower price leads to higher volume, faster payment, or greater lifetime value, the business earns less per sale. Discounts compress gross margins by shrinking the gap between price and cost.

• Tax, fees, and commissions: Discounts typically reduce the taxable amount of a sale rather than being applied after tax. This affects how taxes, fees, and commissions are calculated and reported.

Discounts can affect customer perception of pricing too. If discounts are frequent, customers might focus on the discounted price and see the list price as inflated rather than standard.

What are common types of discounts?

Discounts fall into a few categories. The discount’s structure matters as much as the size because each type nudges customer behavior slightly differently.

Here are the common types of discounts:

• Percentage discounts: A reduction expressed as a percentage of the original price. These are easy to communicate and consistent across different price points.

• Fixed-amount discounts: A set dollar reduction. These create predictable savings, but can have uneven margin effects across products.

• Volume discounts: Per-unit pricing decreases as quantity increases. This rewards larger commitments and consolidated demand.

• Tiered-pricing discounts: Discounts that apply once predefined thresholds are crossed, such as usage tiers or seat counts.

• Early payment discounts: Small reductions in exchange for faster payment, common in invoiced or B2B transactions.

• Loyalty and retention discounts: Discounts reserved for existing customers, subscribers, or members.

• Promotional and seasonal discounts: Temporary price reductions tied to specific events, time periods, or campaigns.

• Bundled discounts: Reduced pricing when multiple products or services are purchased together. This can be effective at increasing sales.

• Conditional discounts: Discounts prompted by specific actions or criteria, such as minimum order size, referrals, or usage behavior.

How do percentage discounts work?

Percentage discounts are one of the most widely used pricing tools. They’re intuitive and easy to compare.

Here’s how they work:

• They scale with price: Higher-priced items generate larger absolute savings, even though the percentage stays the same.

• They’re easy to understand: Customers can immediately grasp what “25% off” means, even if they don’t calculate the exact dollar value.

• They can feel dramatic: Large percentages tend to create a strong psychological impact, sometimes disproportionate to the actual savings.

• They’re predictable for business: Revenue and margin decrease proportionally across discounted items, which makes percentage discounts easier to model than fixed discounts.

• They don’t stack in a linear way: Multiple percentage discounts are usually applied in sequence. Two 10% discounts equal a 19% reduction, not 20%.

• They don’t fit recurring pricing models: In subscriptions, percentage discounts are often used for introductory deals or limited-time promotions rather than applying to the entire subscription cost. The discount applies for a defined period before reverting to the standard rate.

What is a volume discount, and when is it used?

A volume discount lowers the per-unit price as purchase size increases. It’s based on the idea that larger commitments change the economics of serving a customer. Larger purchases can reduce costs related to fulfillment, billing, support, or sales effort, and volume discounts incentivize customers to concentrate spend with one provider and scale within an existing relationship.

These kinds of discounts are widely used in wholesale, manufacturing, enterprise sales, and usage-based or seat-based pricing. They only make sense when increased volume offsets lower per-unit margins. If costs don’t fall with scale, the pricing model becomes fragile.

There are different structures for volume discounts. Some apply within a single transaction, while others are based on cumulative spend or usage over a defined period. Some apply to all units once a threshold is reached, others only to units above that threshold. Minimum purchase levels, contracts, or usage commitments help to manage risk.

What should businesses consider before offering a discount?

Discounts affect pricing, margins, customer behavior, and brand perception. Before discounting, there are a few things businesses should consider.

• Margin impact: Even small discounts can erase profits if margins are thin and volume doesn’t increase.

• Objective: A discount should solve a specific problem, such as acquisition, inventory, cash flow, or retention, rather than just boosting sales.

• Exit strategy: Every discount needs a limit and a plan for returning customers to standard pricing.

• Customer quality: Discounts often attract price-sensitive buyers. Not all of them will stay once prices return to normal.

• Targeting and control: Well-scoped discounts are limited by audience, channel, or time. Broad discounts tend to become permanent.

• Long-term price expectations: Frequent discounts can reset what customers believe the product is worth, which makes the original price harder to defend.

• Brand positioning: Pricing signals value. Heavy discounting can undermine premium or value-based positioning.

• Complexity behind the scenes: Discounts affect billing, taxes, commissions, reporting, and forecasting. The more difficult the discount structure, the greater the overhead.

• Alternatives to discounting: Sometimes it’s better to change packaging, improve perceived value, bundle products, or adjust payment terms rather than lowering the price.

How Stripe Payments can help

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