November 16, 2016

Financial Impact of Discounts and Promotions

Here's what I frequently observe. Please tell me that you measure this stuff as well ... because if you don't, well, hmmmm.

Full-Price Only Customer In 2015, Spending $200 - $249 In 2015.
  • 2016 Full Price Demand = $140 @ 65% Gross Margin.
  • 2016 Discount/Promo Demand = $60 @ 50% Gross Margin.
  • 2016 Total Story = $200 Demand, $121 Gross Margin.
Discount/Promo Customer In 2015, Spending $200 - $249 In 2015.
  • 2016 Full Price Demand = $50 @ 65% Gross Margin.
  • 2016 Discount/Promo Demand = $170 @ 50% Gross Margin.
  • 2016 Total Story = $220 Demand, $117.50 Gross Margin.
The discount/promo-centric customer spend 10% more demand but generates 3% less gross margin dollars.

Now, I get it, you might be comfortable with the margin of error here.

How about this situation?

Full-Price Only Customer In 2015, Spending $200 - $249 In 2015.
  • 2016 Full Price Demand = $140 @ 50% Gross Margin.
  • 2016 Discount/Promo Demand = $60 @ 30% Gross Margin.
  • 2016 Total Story = $200 Demand, $88 Gross Margin.
Discount/Promo Customer In 2015, Spending $200 - $249 In 2015.
  • 2016 Full Price Demand = $50 @ 50% Gross Margin.
  • 2016 Discount Demand = $170 @ 30% Gross Margin.
  • 2016 Total Story = $220 Demand, $76 Gross Margin.
Discount/promotional success is dependent upon existing full-priced gross margins, and is dependent upon the share of demand that comes in via full price.

Every dollar of gross margin becomes a dollar that you can invest in other activities - the funds pay for your bonus - heck, for just about everything!

Gross Margin maximization is a direct outcome of a well-managed business. One could make a case that some businesses cut back on quality, allowing fat gross margins that can absorb 40% off plus free shipping. This is a business model many employ. You'll seldom see these businesses posting 10% pre-tax profit, of course, but it is a business model that can generate success.

In a perfect world, we prefer to sell stuff customers crave at full price.