January 08, 2019

Discount Impact on Marketing Margin

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.
  1. Best-selling items that did not need to be discounted because they were already priced appropriately are now sub-optimized for profitability.
  2. 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.
  3. 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.

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