Your merchandising team works hard to craft items with healthy gross margins.
Item Price = $60.
Cost of Goods Sold = $20.
Marketing Margin = ($60 - $20) / $60 = 66.7%.
Sometimes the item doesn't sell ... so when the merchant takes 20% off to move the item the resulting hit on marketing margin is the responsibility of the merchant.
- Item Price = $60.
- Promo Amount = 20% off, or $12.
- Cost of Goods Sold = $20.
- Marketing Margin = $60 - $12 - $20 = $28.
- Pre-Discount Marketing Margin = $60 - $20 = $40.
Discounts / Promos conceived by the marketing department play a different role ... when the marketer decides to increase demand/profit by via discounting, three things happen.
- Best-selling items that did not need to be discounted because they were already priced appropriately are now sub-optimized for profitability.
- The perception of the brand is tainted ... the brand is no longer a full-price provider but instead is a brand that cheated customers who paid full price.
- Marketing Margin decreases - meaning that other marketing opportunities cannot be invested in because the marketer decided to spend the delta between price and cost of goods sold on discounting.
Discounting should be a last resort, reserved for specific items that are not selling well. More on that topic tomorrow.