Margins and Markups: how to handle multiple discounts/rebates

Following on from an old blog post about Margins and markups What everyone in business needs to know a reader posted this question in the comments

If you’re not sure how to calculate margins, read that first.

Hi, how do you do multiple rebates % to give a true value of what the total discount would be.
I.e. 3% + 6% + 8%, is this 17%

TL;DR … probably not 17% but it depends on how your supplier intended you to do it, more likely
100*0.97*0.94*0.92 = 83.8856 remaining, so
100 – ( 100*0.97*0.94*0.92 ) = 16.1144%

The answer is a blog post in it’s own right, but the short version is: It depends.

The most common use I’ve seen in my industry (UK businesses supplying other businesses with kitchen furniture and appliances) is to Apply each discount in turn, using the last result with the next discount value. The only way to be certain is to ask. Even then, you need to make sure you ask the right person. It seems to get confusing to sales reps and accounts departments alike. In once case, I only figured out by checking past supply invoices.

Simple example:
Supplier gives terms of:

  • 30% off retail price to all customers
  • 10% for displaying 1 product
  • 5% for displaying 3 products

This is typical of the ambiguous wording we see.

Note: I’m using the decimal form to calculate the margin – see how and why on the original blog post
In my own industry;
£100 * 0.3 = £30 discount, £70 cost.
The next 10% is 10% off the remaining COST, not 10% off the original retail price
£70 * 0.1 = £7 = £63 cost
The next 5% is in addition to the prior two discounts and also taken off the remaining Cost, not the original retail price
£63 * 0.05 = £3.15 = £59.85

Therefore, the margin for this supplier is: 40.15%
If you only have one location to put the margin, then use 40.15.

However…. it’s not always this simple, which is why you NEED TO CHECK YOUR SOURCE.

Here’s another example of what I’ve seen.
Supplier gives terms of:

  • 30% off retail price to all customers
  • 10% for displaying 1 product
  • 5% for displaying 3 products

This is typical of the ambiguous wording we see.
Wait, that’s the same example….. That’s right. But this time the supplier thinks it’s obvious everyone knows that the first 30% is given to everyone and that the extra for displaying 10% is 10% off the cost and that the extra extra 5% makes it 15% for displaying 3 products.
Sigh.

£100 * 0.3 = £30 discount, £70 cost.
The next 10% is 10% off the remaining COST, not 10% off the original retail price
£70 * 0.1 = £7
The next 5% is off the remaining cost before we got our earlier discount.
£70 * 0.05 = £3.50
Or, we could just say, 15% off the remaining cost in this case, £70 * 0.15 = £10.50
Total cost: £59.50
Margin: 40.50%

These small differences add up and can get confusing quickly.

Why isn’t there one system? It depends on why the extra margins are being applied and used. I’ve seen it deliberately used to make the discount appear bigger. A sales rep will incorrectly say: “We’ll give you 40% off for displaying this product, and if you display another product too we’ll give you an extra 20% off, that’s 60% discount!”…. no, it’s 100-(100*0.6*0.8)= 52% discount.

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