If you’re one of those brands that likes to discount on Black Friday Cyber Monday, there’s a good chance you’re selling products at a loss.
While you might be meeting your top line sales targets with record high monthly sales, you could be left with no actual profit to show for it if you’re not generating a healthy contribution margin.
Sure, some marketers might tell you that it’s okay to sell your products at a lower margin if you’re doing it in exchange for their data and a potential future customer down the track. But that’s assuming you can actually get repeat orders, and that your customers aren’t rebuying from you through paid ads.
The reality is that unless your business is a subscription model, calculating lifetime customer value is near impossible. You have to rely on assumptions which are just that – assumptions. The truth is, you don’t actually know.
And I don’t know about you, but I like to make money from each product I sell.
In this article:
- How to calculate the unit economics of your product
- How to protect your gross profit while discounting
How to calculate the unit economics of your product
Below is a simple economics demonstration of an ecommerce business comparing two situations – the Base Case (aka the business in its current form) and a BFCM case (aka what the business looks like if you give away your margins through discounting.)
Unit Economics Analysis
Let’s assume the business does about 1000 orders per month, with a gross profit of around 40 per cent (after considering the costs of goods sold and other fixed costs), leaving you with a 12.5 per cent profit margin.
Now if you are giving away a 15 per cent storewide discount, you can see this will directly reduce your gross profit margin – and as you’ve now given away your profit, you’re actually losing money.
You could be crushing sales, but if you’re selling your products at a tiny margin, or even at a loss, you are probably going to lose money.
But Jason, can’t I just sell more volume to make up the loss in margin?
Ahh, yes. The common argument with discount tactics is that a business can make up its loss in margins by increasing sales volume.
That is 100 per cent correct. But this raises the question… how many extra sales do you need to make for every discount?
In the below spreadsheet, you can calculate the additional unit sales required for every per cent of discount that you provide your customers.
Profitable Discounting Calculator
Let’s assume the business sells 1000 units of product per month at a 40 per cent gross profit margin.
If you discount the product by 15 per cent, this means the company needs to increase their sales volume by an additional 60 per cent just to make the same gross profit dollars then if they charged full price.
In other words, instead of selling 1,000 units at full price, the business now needs to sell 1,600 units to make the same gross profit dollars at 15 per cent discount.
How to protect your gross profit while discounting
If you’re going to discount, use tactics to ensure you can maximize your AOV (average order value) and protect your gross profit as much as you can.
One way to guarantee AOV is through a tactic called ‘bundling’, where you can build campaigns that are centered around forcing a higher AOV to cover the cost of discount.
For example, ‘spend and save’ campaigns are an excellent way to ensure your customers are achieving an AOV hurdle before getting any sort of discount from your store.
The next time you’re thinking about putting a blanket 20 per cent discount across your entire store, consider setting AOV hurdles for your customers so that you can discount profitably.
In summary, if you’re running a Black Friday campaign, set yourself a discount budget so that you’re not left with lots of sales but no profit to show for it.
