October 09, 2013

Cyber Monday Tip #5: Profit

Well, you're gearing up for Cyber Monday, aren't you? It's fun - the press talks about your business, there's a buzz in the air, discounts and promotions are available everywhere you look.

Some will be declared "the winners of Cyber Monday", based on social buzz or biggest discounts.

Your CFO will declare you a Cyber Monday winner if you generate more profit, both short-term and long-term profit.

The profit and loss statement we see here is typical. The normal offer is "free shipping" during Christmas, so in this case, the business offers 20% off plus free shipping for Cyber Monday.

Hopefully, some testing is done - testing that allows you to see how the promotion performed against the normal offer. In our case, the promotion did outperform the normal offer.

The "Increment" column is important. With the normal offer, you generate $19,800 profit on $90,000 net sales, at a profit rate of 22%.  In the "Increment" column, you generate $1,800 profit on $90,000 net sales, at a profit rate of 2%.

I once had an EVP tell me that you don't take percentages to the bank - all that matters are dollars. This promotion generates more dollars, right?

Another expert recently told me that you offer the Cyber Monday promotion, because you are going to steal market share from the competition. This one is interesting - I want you to think about this, for a moment. If everybody runs Cyber Monday promotions, and everybody see sales double over a short period of time, but annual sales don't double, then how the heck did you actually steal market share?

It's impossible. You didn't steal market share. Everybody posted gains. And since annual sales increase at maybe 3% to 7%, this tells me no market share was stolen - rather, sales were shifted out of other time periods.

The tip?

Run a test - your best offer against your normal offer - then calculate the "Increment" column in the table above. If you are generating less than 5% pre-tax profit prior to accounting for fixed costs, then you're not accomplishing a whole lot.