Damage Reduction
Every game has it: a method of preventing combos from doing too much damage. Street Fighter IV's method is very straight forward and very easy to calculate and it shows how easily long combos are severely diminished in damage.
Move Based Not Hit Based
Before we get into exactly the numbers of Damage Scaling, one concept needs to be established. In past games, a lot of the Damage Scaling comes from the number of hits in a Combo: as the Combometer gets higher, the less damage each hit does. Thus, moves that do a lot of hits tend to cause the Damage Scaling to kick in quicker, which usually meant that moves that did a lot of hits were generally not good for damage.
This is not the case in Street Fighter IV. They actually figured out a clever way to avoid the pitfalls of going by the Combometer. Instead of going by hits, they decided to calculate Damage Scaling by moves. The more number of moves used in a Combo, the more the later moves start to get scaled. So regardless of how many hits a move does, it only receives the scaling once.
The way the game registers what counts as a move in the scheme of Damage Scaling is pretty simple: anytime a button must be pressed to perform a hit, it counts as a move.
So a move like Ryu's Standing Hard Punch counts as one move. Vega's Close Hard Punch, which hits twice, counts as one move. Honda's Hundred Hand Slap, all 7 hits, count as one move because, although you have to hit 5 punches successively, only the last one actually activates the Special Move. Dudley's EX Machine Gun Punch counts as one move even though it hits 7 times. Even Seth's Hard Kick Hyakuretsukyaku, which hits 17 times, counts as one move.
However, Ken's Target Combo of Medium Punch into Hard Punch counts as two moves because there are two button presses that both activate hits. Guy's full Bushin Gokusaken counts as four moves because you have to hit a button for all four hits of the chain. Fei Long's Rekkaken, when you perform all three hits, count as three moves. And as ridiculous as it may sound, Gen's Hard Kick Gekiro, when you get all 8 hits, counts as 8 separate moves because it requires 8 buttons presses to get all 8 hits.
The Formula
So now that we've established what counts as a move, Damage Scaling follows a really easy formula. Also, please note that any Damage Scaling that occurs due to how much life is left in the Life Meter will be ignored for the rest of this section.
The first two moves of a Combo will always do 100% of their damage. The third move of a Combo will do 80% of its damage. The fourth move will do 70% and each successive move from that point always drops another 10% until it reaches the minimum of 10%. Damage Scaling will never drop a move below 10% damage. And any hit has to do at least a minimum of 1 point of damage. You'll never find a situation where a move gets so scaled that it does 0 points of damage.
Damage Scaling Chart
So here's a handy chart that shows you what the damage scaling is:
Note: Minimum damage possible from a hit is 1 point.
So this is a good indication of just how quickly moves can be reduced in damage. Any Combo that starts off with lots of Light Attacks will start reducing damage quickly. For example, Sakura can do two Crouching Light Punches into a Standing Light Punch linked into a Crouching Medium Kick canceled into a Hard Punch Shouoken. By the time the Crouching Medium Kick connects, it's the fourth move in the combo so it's already doing 70% damage! And by the time to Shouoken is hitting, it's already doing only 60% damage. It's definitely better to get a lot of the stronger hits up front, otherwise your combo could end up very weak.
Focus Attacks and Ultra Combos
There are a couple of exceptions, however: Focus Attacks (regular and EX) and Ultra Combos. Both of these attacks will count as two moves in the equation of Damage Scaling. And for Focus Attacks, this is regardless of what level Focus Attack you perform.
That means if you perform a Combo such as Ryu's Close Hard Punch canceled into a Hadoken. The Close Hard Punch, being the first move, will do 100% damage. The Hadoken, the second move, will also do 100% damage. However, if Ryu performs a combo where he cancels Close Hard Punch into a Level 1 EX Focus Attack, the Close Hard Punch will do 100% as the first hit, but the EX Focus Attack will instantly be counted as two moves. So when it connects, it will count as the third move in the combo, not the second, and thus only do 80% of its damage. Another example would be if Rufus catches the opponent out of the air with his Jumping Hard Kick and Juggles the opponent after he lands with the Space Opera Symphony. The Jumping Hard Kick, even though it is two hits, counts as the first move and will do 100%. But the Space Opera Symphony will count as two moves and thus register as the third move and do 80% damage.
That means a Focus Attack and Ultra Combo can only do 100% of their damage if they connect as the very first move of a Combo. When they connect, they will automatically be registered as the second move, but the second move still does 100% damage. But if you ever do any move beforehand that does damage, they will be, at minimum, the 3rd move of a Combo and automatically do only 80% damage. And that also means that landing the Crumple Stun off of a Focus Attack and going directly into an Ultra instantly scales the Ultra damage down quite a bit. The Focus counts as the second move, which will do 100%, but the Ultra will now count as the fourth move and only do 70%!
This is why sometimes you are better off not landing an Ultra Combo at the end of a very long combo. For example, you'll see a lot of Balrog players not Juggle with his Ultra after performing a long combo. Let's say a player performs the Combo of Crouching Light Punch, Crouching Light Kick into EX Dash Upper linked into another Crouching Light Punch, Crouching Light Kick into Buffalo Head. That's already six moves. He can Juggle with the Violent Buffalo at this point, but since it'll instantly count as the eighth move in the combo, it's only going to do 30%. And by that point, unless you just need that tiny bit left to finish someone off, it's just not worth doing it.
No Damage Moves
Some moves, however, do not actually do any damage and, thus, don't actually affect the damage reduction nor count on the Combometer. Fei Long's Tenshin, for example, doesn't do any damage so it won't affect the scaling at all even though you can use it in the middle of a combo thanks to Crumple Stuns and regular Dizzies.
Everything Is Scaled
Damage isn't the only thing scaled during combos, however. Two more things are affected by the same scaling that damage is: Stun Damage and Super Meter gain. So the longer your combo goes on for, the less and less Stun you'll deal to the opponent and the less and less Super Meter you'll gain from the moves connecting on the opponent. Both of these follow the exact same formula as damage, with the 3rd hit reducing to 80% and each hit thereafter reducing by another 10%.