How much does a discount code really cost an online store?

The short answer

A discount code costs the discount multiplied by every order that uses it, including the orders that would have happened anyway. To pay off, it has to bring in enough extra sales to make up for the margin lost on each order. With a 40% gross margin, a 10% discount only breaks even at 33% more sales. Below that, the code lowers your profit, even if revenue goes up.

The math almost nobody does

A discount is not paid out of the price, it is paid out of the margin. If you sell a product for €100 with €40 of gross margin, a €10 discount does not cut your earnings by 10%: it cuts them by 25%. You have to sell more to get back to the same total profit.

The volume increase you need is simple to compute:

sales increase needed = discount ÷ (gross margin − discount)

Applied to common cases:

30% gross margin: a 10% discount needs +50% sales, 15% needs +100%, 20% needs +200%.
40% gross margin: a 10% discount needs +33% sales, 15% needs +60%, 20% needs +100%.
50% gross margin: a 10% discount needs +25% sales, 15% needs +43%, 20% needs +67%.

A 20% discount on a 30%-margin product has to triple sales just to lose nothing. Few campaigns manage that.

Hidden cost #1: buyers who would have paid full price

A discount code does not know who needs it. It benefits the customer who was hesitating just as much as the customer who had already decided and simply found it along the way. For that second customer, the discount is margin given away with no extra sale.

This is the biggest cost, and the hardest to see: it shows up in no report, because the order would have existed anyway. The only way to estimate it is to compare conversion rates for periods with and without a code, or to test part of your traffic without one.

Hidden cost #2: code leakage

A code meant for a newsletter or a partner rarely stays there. Coupon sites and browser extensions collect codes and apply them automatically at checkout. Honey, the best-known extension, still had about 14 million Chrome users in July 2025.

The result: a code created to reward your subscribers gets used by strangers who were already at checkout. That is hidden cost #1, at a larger scale.

Hidden cost #3: the "promo code" field drives buyers away

The Baymard Institute, which has tested checkout usability for years, observed that the "promo code" field alone makes some buyers stop, then leave the site to look for a code elsewhere. Once they leave, some of them never come back. Baymard recommends hiding this field behind a link rather than showing it prominently.

In other words, your promotion can lose you sales from customers who would otherwise have paid.

Hidden cost #4: price is your most powerful lever

A McKinsey study of S&P 1500 companies found that a 1% price increase, at constant volume, raises operating profit by about 8% on average. The effect works both ways: every point of price given away for nothing weighs heavily on the bottom line. A habit of routine discounts, even small ones, costs far more than its percentage suggests.

How to measure the real cost of your codes

The share of orders using a code. If it is far above the share of customers you were targeting, the code has leaked.
Conversion with and without a code. Compare comparable periods or traffic segments. If conversion barely moves, you are mostly discounting buyers who had already decided.
Margin per order, not just revenue. A campaign can post record sales and a drop in profit.
Where your code shows up. Search for your store name plus "promo code": you will know in a minute whether it is circulating.

What to do instead

The point is not to stop discounting altogether, but to keep discounts for the sales they actually tip over:

unique, limited-use codes, which cannot leak;
conditional discounts, given in exchange for a behaviour (a bigger basket, a sign-up) rather than to everyone;
a discount at the moment of hesitation, when a buyer shows they will not complete the purchase at the listed price. That is the idea behind price negotiation: the discount only exists if it helps close the sale, and its size depends on that buyer. We compare the two approaches in bepleez vs a classic discount code.

Frequently asked questions

Does a discount code always increase revenue? Often, yes. But revenue is not profit: if the increase in sales does not clear the threshold computed above, you earn less than before.

What is the maximum discount I should offer? It depends on your gross margin. Compute the sales increase it requires with the formula above; if that increase looks unrealistic, the discount is too deep.

Do unique codes solve leakage? They stop sharing, yes. They do not solve hidden cost #1: a unique code sent to a customer who had already decided is still margin given away.

Is free shipping cheaper than a discount? Not necessarily: it has a real cost per order. The same math applies, replacing the discount with the shipping cost you absorb.

Sources

McKinsey & Company, The power of pricing, McKinsey Quarterly, 2003: effect of a 1% price increase on operating profit.
Baymard Institute, guidelines on displaying promotional fields at checkout (guideline #615).
9to5Google, "Honey just lost a million more Chrome users", July 2025.
Break-even calculations: bepleez.