What is discount rate in ecommerce?
How is discount rate calculated?
Take the amount knocked off the price. Divide it by the original price.
You can work it per order or average it across all orders. The average is the number to watch, because it shows how much of your list price you really collect. Some people call the same idea average discount, markdown rate or discount depth. We use discount rate.
Why does discount rate hit margin so hard?
A discount cuts the price but not the cost. Cost of goods, delivery, payment fees and returns stay as they were. So the whole discount comes out of what is left per order.
Example (illustrative): An order sells at 100 and costs 60 to make, ship and handle. That leaves 40. Take 20 per cent off. The price is 80, the cost is still 60, and 20 is left. A fifth off the price removed half the margin.
That matters for ads. Break-even ROAS (return on ad spend) is 1 divided by margin. At 40 left on 100, break-even is 2.5. At 20 left on 80, it is 4.0. The same ad now has to bring back far more revenue just to avoid a loss. Our view is to use contribution margin before marketing for this sum: gross margin stops before delivery, payment and returns costs, so it overstates what is left. See break-even ROAS for the full sum.
Our view: a campaign that looks fine in the panel can be losing money once the discount it needed is in the margin.
For what the evidence says, read are ecommerce discounts profitable.
Worked example
Easily confused with
Discount rate vs Discount rate (finance)
In finance, the term names a different idea: the rate used to turn future cash flows into today's value. Same words, unrelated to price cuts.
Discount rate vs Gross margin
The share of revenue left after the direct cost of the products sold. Discount rate moves it, but it is not the same measure.
Discount rate vs Average order value (AOV)
Revenue divided by number of orders. Discounts change AOV, but AOV does not tell you how deep they went.
FAQ
Is a high discount rate always bad?
No. It depends on what is left after it. Check contribution margin and break-even ROAS before you judge it.
Is discount rate the same as discount depth?
In ecommerce, yes. Both describe how deep a price cut is. We use discount rate, and add that it is not the finance term.
Let’s find what’s actually working.
Next step. Put your own discount into the sum with the Is your ROAS real? calculator.