December 01, 2014

Cyber Monday Math

One of the things I'm told is that everybody must discount on Cyber Monday in an effort to "remain competitive".

I'm told that by being competitive, sales increase. And I believe that sales do increase. Tests clearly indicate that sales increase.

In fact, by offering 40% off instead of selling at full price, it is possible to increase sales considerably. Some folks double sales. Some obtain less optimistic outcomes.

So let's run a pair of simulations. In the first simulation (attached here), I demonstrate the gross margin dollars generated on an order at full price, at 20% off, at 40% off, and at 60% off (assuming a 40% cost of goods sold - which is common in cataloging and e-commerce but uncommon in retail, meaning the result in retail would be much worse than this).

As you can see, if you take 40% off, you generate $20 of gross margin ... if you sell at full price, you generate $60 of gross margin.

In other words, you need to sell 3x as much as normal, at 40% off, in order to generate the same amount of gross margin dollars.

So, if you were discounting like there was no tomorrow over the weekend ... consider this ... your sales could have dropped by 60% by selling at full price, and you would have made more money.

In the bottom half of the table, we see the problem ... if discounting gets us a 2x lift ... if it doubles sales over where they would otherwise be, gross margin dollars are cut by 33%. Yes, you double sales, and you cut profit by 33%.

It is becoming obvious that some business leaders would rather listen to members of the media than to their own Chief Financial Officer ... or to Shareholders.

In your Christmas 2014 post-mortem, have your CFO run simulations of what would have happened if you had sold at full price, and had your sales cut by between 25% and 50%. What would have happened to profitability?

At least run the simulation. Let me know what you learn. Maybe I am wrong.