I recently received some vouchers from Shell’s loyalty card scheme giving me 10 extra points when I fill up at one of their stations. Since I get a £2.50 voucher from their partner, Waitrose, whenever I save 500 points, it’s not difficult to work out that this voucher is worth just 5p.
1. Work out how much this promotion will cost you to execute and administrate.
This needs to take into account everything e.g planning time, graphic design time, printing costs, sales people’s time etc.
2. Calculate your expected return?
If you’re offering a monetary reduction, whether that is a discount, voucher, loyalty points or free delivery, you need to know exactly how that discount will impact on your bottom line. A promotion is only worth doing if it increases profit.
Your expected profit without the promotion (let’s call that value X) can be worked out by looking at historic sales.
Your expected profit with the promotion (value Y) needs to take into account the cost of executing the promotion (worked out in step 1 above), the cost of producing and delivering the goods, and any additional costs which will be incurred if there is a spike in demand (e.g over-time or agency staff).
Your calculation should look like this:
Expected profit (Y) = [(Normal price – discount – cost of manufacture & delivery) x (no of sales)] – (cost of execution + additional costs)
If ‘X’ is more than ‘Y’ then your profit will be higher if you don’t do the promotion: the only exception being if you are very confident that you will make that loss back several times over on cross-sales and repeat business.
3. Play out different scenarios.
In your calculation above, see what happens to your profit under different promotion scenarios.
Reduce your discount from 15% to 10%. Your sales may go down but so will your costs, so your profits might increase.
Increase your discount to 20%. Sales may increase and production costs may go down as a result of scale, but you’re also squeezing your profit margin and increasing the risk of incurring extra cost to fulfill all the orders.
Play out a few scenarios and work out how much you need to give away in order to maximize your profit.
4. What if the promotion is not as popular as expected?
Before you launch the promotion, calculate your break-even point: this is the number of sales you need to bring in to make the promotion worthwhile. If you’ve done the calculations in steps 1-3, it’ll be easy because it’s the number of sales needed to make X = Y.
Regularly check your progress towards this target to make sure you’re on track. If you aren’t on track, make changes quickly to minimise any losses. Can you extend the promotion? Can you publicise it more widely?
Be careful of sending good money after bad: always go back to the numbers and work out if any extra investment is going to be worth it. It may be better to just make sure the next promotion doesn’t repeat the mistake.
5. What if the promotion is too popular?
Unless your promotion is on a product that can simply be removed from sale or listed as “out of stock” (if selling online), you need to make sure that you have considered the implications of your promotion being too popular.
Consider including restrictions such as “for the first 500 applicants” or “one per household” to enable you to cap the impact of your promotion and ensure you don’t become a victim of your promotion’s success.