Promotion Profitability - Management By The Numbers

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Promotion Profitability
This module covers the concepts of baseline sales,
incremental sales, promotional lift, return on marketing
investment (ROMI), coupon redemption and passthrough percentages on promotions.
Author: Paul Farris
Marketing Metrics Reference: Chapter 8
© 2014 Paul Farris and Management by the Numbers, Inc.
There are many frameworks for analyzing promotions:
• Hierarchy of effects: Trial, repeat, loyalty
• Price discrimination: Different prices, different segments
• Brand equity: Franchise-building versus volume-building promotion
PROMOTION FRAMEWORKS
Promotion Frameworks
• Loyalty programs: Core consumer rewards versus customer
acquisition
• Competitive dynamics: Price leadership and prisoners’ dilemma
Insight
These frameworks represent the purpose and rationale for various
promotional approaches. Depending on the purpose, the promotional
goals will differ.
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Once the rationale for the promotion is chosen, the next step
is to measure its potential effectiveness.
In this module our focus will be on the following analysis
techniques:
ANALYZING PROMOTIONS
Analyzing Promotions
• Incremental volume versus baseline volume (“lift”)
• Return on marketing investments
• Accounting for changes in volumes and margins as well as
incremental fixed costs
• Trade promotion pass through to retail price promotions
• Economics of coupons and rebates
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Definitions:
Total Sales (in $ or Units) = Baseline Sales + Incremental Sales
- where Baseline Sales = Expected sales results in the absence of any
marketing program or promotion
- and Incremental Sales = Sales “lift” attributable to marketing activities
A common challenge in marketing is the ability to estimate
the incremental effects, or sales “lift”, attributable to
specific marketing activities.
BASELINE, INCREMENTAL SALES, AND LIFT
Baseline, Incremental Sales and Lift
Justification of marketing expenditures (a.k.a. marketing
“spend”) involves estimating the incremental effects of
a program under evaluation.
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Definition:
Baseline Sales: Expected sales results in the absence of any
marketing program or promotion.
BASELINE SALES
Baseline Sales
Estimates of baseline sales establish a benchmark for evaluating the
level of incremental sales generated by specific marketing activities.
Creating a baseline of expected sales helps to isolate any incremental
sales that may actually be a result of other influences such as
seasonality, market growth and competitive activity, etc.
Insight: Baseline Sales are determined by historical sales patterns,
controlling for seasonality, etc., and other non-marketing factors that
would affect the expected level of sales without the marketing activities
being considered.
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Definition
Incremental Sales: Sales “lift” attributable to marketing activities
INCREMENTAL SALES
Incremental Sales
Incremental Sales: Total Sales – Baseline Sales
OR
Incremental Sales from Advertising
+ Incremental Sales from Trade Promotion
+ Incremental Sales from Consumer Promotion
+ Incremental Sales from Other Marketing Activities
Insight: Establishing baseline sales and determining the lift attributable
to marketing activities is more difficult than one might imagine, as the
following example illustrates.
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Question 1: Francophile Tutors, a maker of high quality language
DVDs is considering a back to school promotion in August. July’s
sales were 26,028 and last August’s sales were 48,960. The price to
distributors is regularly $48, but for August, distributors will receive a
special discount of $6.40 per DVD if specific sales targets are met. If
these sales targets are met, sales are estimated to reach 75,174 units.
PROMOTIONAL EFFECTIVENESS
Promotional Effectiveness
The variable costs for the DVDs and packaging is $25.76, but after
considering allocated overhead and administrative costs, the
company’s internal standard cost is $34.70.
Francophile Tutors’ VP of Marketing is sure the promotion will be a
success, but the President has hired a consultant who thinks
otherwise. The Marketing VP calculates an incremental profit of
$611,893 while the consultant’s analysis estimated an incremental loss
of $132,467 on the promotion.
Should Francophile run the promotion?
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Consultant
Promotion
Baseline
75,174
48,960
$41.60
Marketing VP
Promotion
Baseline
Pieces
75,174
26,028
$48.00
Price
$41.60
$48.00
$34.70
$34.70
Cost
$25.76
$25.76
$6.90
$13.30
Margin
$15.84
$22.25
$518,701
-$132,467
PROMOTIONAL EFFECTIVENESS
Promotional Effectiveness
$651,158 Contrib. $1,190,756 $578,863
NO!
Profit
$611,893
YES!
These two estimates differ in both the assessment of the
baseline volume that would have been achieved without the
promotion and the variable cost of the product, so the
differences in profitability estimated for the promotion are
extreme.
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Answer:
Probably neither the Consultant or the Marketing VP got it right. The
consultant added in fixed cost inappropriately and the Marketing VP used a
July baseline for a clearly seasonal product (educational sector) which would
be a bad assumption. Whether last August is appropriate depends on other
factors not included in the problem.
PROMOTIONAL EFFECTIVENESS
Promotional Effectiveness
Given the information provided, the best answer is probably calculated as
follows:
Promotion Contribution = 75174 * (41.60 – 25.76) = $1,190,756
Baseline Contribution = 48,960 * (48.00 – 25.76) = $1,088,870
Net Effectiveness = $1,190,756 – $1,088,870 = $101,886 Yes!
Insight
The point of this problem was to show the difficulty companies face
when making these decisions and how different assumptions can lead to
different outcomes. Things are not always as clear as in textbooks!
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Definition
Lift (%): a key metric in measuring the incremental sales generated
from a marketing program, as a percentage of baseline sales
PROMOTION LIFT
Promotional Lift
Lift (%) = Incremental Sales ($,#) / Baseline Sales ($,#)
Definition
Cost of Incremental Sales ($):
Cost associated with an additional
unit of sales
Cost of Incremental Sales ($) =
Marketing Spend ($)
Incremental Sales ($,#)
Both measures can be utilized to determine short-term effects of
marketing efforts.
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Definition
Return on Marketing Investment (ROMI) = a measure of the rate at
which spending on marketing contributes to profits
Return on Marketing Investment (ROMI) =
(Incremental Sales * Contribution Margin – Marketing Spending) /
Marketing Spending
Question 2: Francophile Tutors spends $100K on a new ad campaign that
generates incremental DVD sales of $200K. Francophile’s profit margin is
65% and the company’s baseline sales for the same period is $800K.
RETURN ON MARKETING INVESTMENT (ROMI)
Return on Marketing Investment (ROMI)
• What is the lift% (based on $)?
• What is the ROMI?
• What is the promotional cost per incremental sales dollar?
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Answers
Lift %
= Incremental Sales ($) / Baseline Sales ($)
= $200,000 / $800,000 = 25%
ROMI
= (Incremental Sales * Contribution Margin – Marketing
Spending) / Marketing Spending
= (($200 * .65) - $100) / $100
= ($130 - $100) / $100 = 30% (Note: not 130%)
Incremental Cost
= Marketing Spending / Incremental Sales
= $100 / $200 = $0.50 or 50%
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LIFT AND ROMI EXAMPLES
Lift and ROMI Examples
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Definitions
Coupon Redemption Rate: the percentage of distributed coupons or
rebates that are redeemed by consumers
Coupon Redemption Rate (%) =
Coupons Redeemed (#)
Coupons Distributed (#)
Cost per Redemption ($) =
Coupon Face Amount ($) +
Redemption Charges ($)
COUPON REDEMPTION
Coupon Redemption
Coupon Redemption Rate is a key metric in assessing the
effectiveness of a coupon distribution strategy, helping to determine if
the coupons are reaching those customers most likely to use them.
Cost per Redemption helps measure the variable cost associated with
each coupon redeemed. Generally, coupon distribution costs are
considered to be fixed costs.
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Question 3: Francophile Tutors decided to try a mid-semester promotion
by distributing coupons of $10 off in October via direct mail to students
enrolled in language programs. The company distributed 30,000 coupons and
600 were redeemed.
• What is the coupon redemption rate?
• If it costs $2 to process each coupon, what is the cost per redemption?
Answers
Redemption Rate
= Coupons Redeemed / Coupons Distributed
= 600 / 30,000 = 2%
Cost / Redemption
= Face Amount + Redemption Charges
= $10 + $2 = $12
COUPON REDEMPTION EXAMPLES
Coupon Redemption Examples
Insight
Redemption rates alone are not a good measure of success, as
sometimes even low redemption rates may be profitable while high
rates may be damaging.
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Pass-Through Percentage is the portion of
the promotional value provided by a
manufacturer to a retailer or distributor that
ultimately reaches the end consumer.
Definition
Pass-Through Percentage (%) =
Value of Promotional Discounts Provided to Consumers by the Trade ($)
Value of Promotional Discounts Provided to Trade by Manufacturer ($)
PROMOTION AND PASS-THROUGH
Promotion and Pass-Through
Percentage Sales on Deal tracks the percentage of sales that are
sold under a temporary discount of any kind.
Definition
Percentage Sales on Deal (%) = Sales with temporary discount / total
sales.
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Question 4: In December, Francophile Tutors decided to provide its
distributors with a $5 per unit discount. Normally, the list price of the DVD is
$99, but the company’s largest distributor would be selling it for $89 in
December thanks to the promotion. Overall, for the year, 750,000 units were
sold, 250,000 of which were sold during one of the periods of special
promotions.
• What is the pass-through percentage rate (%)?
• What is the percent of sales on deal for the year?
COUPON REDEMPTION EXAMPLES
Coupon Redemption Examples
Answers
Pass Through Rate
= Value Consumer Disc. / Value Trade Disc.
= $10 / $5 = 200%
Sales on Deal
= Sales on Deal (#) / Total Sales (#)
= 250,000 / 750,000 = 33.3%
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FURTHER REFERENCE
Further Reference
Marketing Metrics by Farris, Bendle,
Pfeifer and Reibstein, 2nd edition, chapter 8.
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