April 23, 2018

30% Off!!!

Here's what a typical order looked like (from yesterday):
  • Three items at $35.00 = $105.00 net sales.
  • Cost of goods for three items at $17.50 = $52.50.
  • Gross Margin Dollars = $105.00 - $52.50 = $52.50.
  • Shipping Revenue = $10.00.
  • Shipping Expense = $8.00.
  • Net Shipping Revenue = $2.00.
  • Total Profit from the Order = $52.50 + $2.00 = $54.50.
At some point the widget business becomes "competitive" or "Amazon enters the space" or the merchandising team messes up and it's harder to sell widgets. A valuable marketing team has several tricks up their sleeve ... a typical marketing team says "30% off"!!!

Are customers surprised and delighted? 

Well, you get more orders, that's for sure.

But the dynamics of your business have been changed.
  • Three items at $35.00 = $105.00 demand.
  • 30% off = $31.50 discount.
  • Net Sales = $105.00 - $31.50 = $73.50.
  • Cost of goods for three items at $17.50 = $52.50.
  • Gross Margin Dollars = $73.50 - $52.50 = $21.00.
  • Shipping Revenue = $10.00.
  • Shipping Expense = $8.00.
  • Net Shipping Revenue = $2.00.
  • Total Profit from the Order = $21.00 + $2.00 = $23.00.
You used to generate $54.50 variable profit per order.

You now generate $23.00 variable profit per order.

But order volume increases by 50% ... customers love your (albeit highly discounted) brand once again. Isn't that all that matters?

Well, here's the situation:
  • You used to generate 1.00 orders at $54.50 profit per order = $54.50.
  • You now generate 1.50 orders at $23.00 profit per order = $34.50.
Worse, you've trained your customer to expect 30% off.

Tomorrow we take a look at free shipping ... another favorite in the marketer playbook.


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