October 13, 2008

Poison Percentage

Ever wonder how you're really impacting your business with all of those free shipping and 20% off offers and bogos and whatever additional incentives you're offering the customer to buy merchandise?

One metric I've run for folks is called the "Poison Percentage" --- the percentage of volume, on a rolling twelve month basis that is generated because of a promotion.

I tend to stay away from item-level discounts, as those are influenced more by price elasticity and clearance activity --- those can be analyzed via a separate metric.

So the poison percentage focuses on free shipping, cheap shipping, percentage off an order, any promotion contrived by the marketing folks, any promotion that comes between the customer and the merchandise.

If that percentage is "high", maybe more than twenty percent of the total sales volume, then the business is being "poisoned", or so the theory goes. If you can drive enough volume and profit on discounted transactions --- and increase lifetime value in the process, then of course, you're not poisoning the business.

You'd run a profit and loss statement as follows:

Business With Discounts



Clean Sales Promotions Tot.Company
Demand $20,000,000 $10,000,000 $30,000,000
Net Sales $16,000,000 $7,700,000 $23,700,000
Gross Margin $8,800,000 $4,235,000 $13,035,000
Less Marketing Expense $3,200,000 $1,309,000 $4,509,000
Less Discount Expense $0 $1,200,000 $1,200,000
Less Pick/Pack/Ship Expense $1,840,000 $885,500 $2,725,500
Varaible Profit $3,760,000 $840,500 $4,600,500
Less SG&A Expense / Fixed Cost $2,000,000 $1,000,000 $3,000,000
Earnings Before Taxes $1,760,000 ($159,500) $1,600,500








Business Without Discounts



Clean Sales W/O Promos Tot.Company
Demand $20,000,000 $7,000,000 $27,000,000
Net Sales $16,000,000 $5,390,000 $21,390,000
Gross Margin $8,800,000 $2,964,500 $11,764,500
Less Marketing Expense $3,200,000 $916,300 $4,116,300
Less Discount Expense $0 $0 $0
Less Pick/Pack/Ship Expense $1,840,000 $619,850 $2,459,850
Varaible Profit $3,760,000 $1,428,350 $5,188,350
Less SG&A Expense / Fixed Cost $2,000,000 $1,000,000 $3,000,000
Earnings Before Taxes $1,760,000 $428,350 $2,188,350

You make assumptions about what would happen if you drop the discounts and promotions --- maybe within that audience, you lose 30% of your business, but you end up managing a smaller but more profitable business.