The Disservice of Discounting

It seems to me that when businesses want more sales, their first instinct is: Let’s run a discount! Black Friday’s coming? Better have a deal. Third Thursday of the month? Why not toss out a promo. But here’s the thing — nothing sabotages consistent sales quite like indiscriminate consistent discounting.

As consumers, we’ve all felt the sting. You buy one of your favorite products at full price, only to see it discounted a week later. Ouch. That moment doesn’t just hurt your wallet — it rewires your behavior. Next time, instead of buying at the regular price, you wait. You stock up during the discount and hold off until the next one rolls around. Congratulations! We’ve just trained customers to buy only when there’s a deal.

Now, here’s the real kicker: after the discount ends, how often do we actually calculate the cannibalization rate?

Cannibalization: The Quiet Thief

At its core, cannibalization is a shift. Customers who would have bought your full‑price product instead buy the discounted one. The formula that captures this shift is refreshingly simple:

This is the Cannibalization Rate (CR) — the percentage of your promotional lift that came from your own backyard.

What the Formula Actually Means

Picture two buckets:

  • Bucket A: Your existing, full‑price product
  • Bucket B: Your discounted or newly introduced product

When you run a promotion, Bucket B fills up. But the key question is:
How much of that water came from Bucket A?

The formula compares:

  • Units Lost — how many units Bucket A stopped selling during the promotion
  • Units Gained — how many extra units Bucket B sold because of the promotion

If half of Bucket B’s lift came from Bucket A, your CR is 0.50.
If almost all of it came from Bucket A, your CR might be 0.80 or higher.
If very little came from Bucket A, you might see a CR of 0.10 or lower.

The beauty of this formula is its simplicity:
It tells you whether your promotion created new demand or just reshuffled existing demand.

When Cannibalization Becomes a Problem

You might think, “Well, a little cannibalization is fine, right?”
Sure — until it’s not.

In high-visibility markets, even a cannibalization rate of 20–30% can be problematic (Thompson et al.). And in Pricing and Revenue Optimization, the authors warn:

“Even fairly low rates of cannibalization can outweigh the benefits of price differentiation.”

Translation: if you’re segmenting customers and setting optimal prices, you’d better understand how much cannibalization is lurking in the shadows — and price accordingly.

Segment First, Discount Second

Economics tells us that discounts can make sense — under the right conditions. But if you’re going to discount, you need proper segmentation. Blanket promotions without strategic targeting are like watering your lawn with a fire hose: messy, wasteful, and likely to flood your margins.

So let’s take a hard look at the discounts we’ve already extended. Measure them. Evaluate them. Ask whether they were worth what they did to the overall business.

Because as Jeff Bezos put it:

“Lowering prices is easy. Being able to afford to lower prices is hard.”

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