The Profit First Pricing Test: Why Discounts Could Drain Your Business Before You Know It
When Discounts Kill Your Real Revenue
You’re busy running a business, juggling expenses, payroll, and, of course, trying to make a profit. So when a client suggests discounting products to boost sales, your instinct might be, “Sounds like a quick win.” But here’s the catch: not every dollar that comes in counts the same. If you slice prices, will you still cover profit, taxes, and pay yourself? Probably not—unless you sell way more, which is rarely realistic.
Real Revenue and the Profit First Pricing Test
Profit First’s “Real Revenue” concept is simple but powerful: it’s the money left after you subtract direct costs to deliver your product or service. Think of it like your true cash pool for overhead, owner pay, taxes, and profit. This isn’t your gross revenue; it’s what really matters.
Let’s say your business is making between $500K and $1M in Real Revenue annually. Profit First suggests allocations like:
- 5% to 15% for profit
- 15% to 30% for owner’s pay
- 15% to 30% for taxes
- The rest covers operating expenses
These are rough but useful guides. The key? Your pricing has to cover these allocations without forcing you into chasing volume like a hamster on a wheel.
The Danger of Discounting: A Real-World Scenario
I recently talked pricing with a client pondering discounts to land more deals. We ran the numbers through the Profit First lens and realized
- The discounts cut deeply into Real Revenue
- Overhead and owner’s pay wouldn’t be covered unless sales volume doubled (which wasn’t feasible)
Bottom line? Discounting was a losing game. It left him strapped to pay himself and taxes, and profit disappeared.
So, what’s the alternative?
Beyond Discounts: Smart Pricing Strategies
Instead of slashing prices, focus on:
- Value-based pricing: Charge for the value you deliver, not just your costs.
- Package offers: Bundle services that increase revenue without driving up costs proportionally.
- Clear minimum pricing: Know your floor price that sustains your business financially.
Running the Profit First Pricing Test means asking:
- Does this price cover direct costs and leave enough Real Revenue?
- Can overhead, taxes, profit, and owner pay be funded from this Real Revenue?
- Is my volume target realistic to hit these numbers?
If the answer to any is no, rethink your pricing or strategy.
3 Actionable Steps to Try This Week
- Calculate your Real Revenue: Subtract direct costs from your total revenue to see your true cash pool.
- Apply Profit First allocations: Use the typical percentages as a benchmark to split your Real Revenue.
- Test price changes against these numbers: Before discounting, run the math to see the impact on your profit, tax, and pay needs.
This exercise isn’t about perfection but clarity. Once you see your numbers clearly, you’ll make smarter decisions—whether it’s pricing, promotions, or product mix.
Wrapping It Up
Discounting might feel like a quick fix, but without checking your Real Revenue and Profit First allocations, you risk bankrupting your own paycheck. Use the Profit First Pricing Test to verify your prices fund profit, taxes, and your pay—then strategize beyond discounts to grow smartly.
Ready to see where your real numbers stand? Grab a Free Profit First instant assessment and book your Cash Clarity Call. Get clear, get confident, and get profitable.
