Hi everyone, someone in another internet forum described a cross promotion she does. She gives out 10$ gift cards to pet shelters who in turn hand them to adopters. When adopters redeem the coupons in her shop, she then sends $5 to the shelter ($5 per coupon redeemed). She told me that she calculates that the program costs her $7 to gain a new customer. I’ve asked her to spell out that math for me because it’s not adding up, but she’s super swamped at the moment and won’t be able to reply for some time. Meanwhile, I was hoping someone else who does similar marketing/promotions can perhaps explain it to me.
It sounds to me like she’s losing $15 on each gift card redeemer. Of course if the customer returns then it may be worth it. But can anyone figure out why I’m wrong about the math and how she comes up with $7?
You’re assuming the customer only spends the $10 gift card. Assume - as I’ll bet the business owner does - that the redeemer spends an average of $22 when redeeming the card.
$22 minus $10 card minus $5 rebate to the shelter = $7.
Well, we don’t know all of the numbers, but there are possible values that do make it add up. Suppose, for instance, that of the adopters who get a gift card, only one in five redeem them. That means that the average cost to her of the $10 gift cards is only $2 each, which added to the $5 donation afterwards, equals the $7.
Or it could depend on the margin she makes on her merchandise (presumably pet supplies?). She might be counting the cost of the gift cards as being only the cost of the merchandise to her, which will be some amount less than $10.
Does it matter if you add in the cost accounting/profit margin? (Hope you’re patient with me, I like to work the numbers.)
Say the $22 product they buy has a $2 profit margin without coupons/discounts. That still puts me in a loss, right? It would be 22 - 10 (cost of goods sold) - 10 - 5 = -3.
If the average purchase with the gift card is more than $10, and her margins are high enough maybe that’s how it works out based on actual redemptions. Even if the customers only use the coupons to make $10 purchases as long as the margin is not 0% it’s costing her less than $15 on a per transaction basis. If her margin is 80% then the $7 figure would be correct, her cost for product sold is $2, plus $5 she gives to the shelter. It’s not a very useful figure since it doesn’t account at all for the increased volume she’s looking for in new customers.
Okay, I hear you so far. I’m thinking of doing this with my shop also, which is why I’m puzzling this out. My case is different from hers, since she carries one product she manufactures and I carry a variety of products from different suppliers. I love the idea of it and my purpose is also to increase my customer-base. But I need to ensure that I don’t lost my shirt in the process.
So, if my margin is around 5% (it varies by product, but in general I keep it low because my prices are higher than amazon etc to begin with), I am likely to lose money on some number of sales but maybe make it up with an increased customer base or over time. Huh, kinda fuzzy still.
If you can, I would suggest giving MORE information about your specific business. For some businesses this sort of thing makes sense. For others it would not.
I might add that young people do not know the concept of “You must give to receive”. This is thinking ahead or thinking long term. So for the particular business above, the $10 thing could pay off big in future years.
The only math problem is you don’t know all the numbers involved. (And I’d be surprised if she’s willing to share her wholesale prices with you.) She’s not losing the retail cost + $5.00, she’s losing the wholesale + $5.00. Well plus overhead, which for one item is negligible. Standard retail markup is about 100%*, which is to say an item that wholesales for $10.00 will sell for $20.00. Cheaper things are usually marked up at a higher percentage, because overhead becomes a bigger percentage of the cost of the merchandise. If someone uses the $10.00 gift certificate for just a $10.00 item, chances are good the the wholesale was only 2-3 bucks.
*On Restaurant Impossible Robert Irvine tells owners that they need to price their food at 3 times the cost of the ingredients to cover overhead and make a little profit.
Yes, very true. I’ve been analyzing every sale (because my sales volume is low enough to do that, still) to check if each one was profitable or not, and I just added a margin computation to it. I’m averaging 120% margin so far, which is far higher than what it seemed like. Here is the formula I’m using:
I’ve left out taxes on purpose because those should be breakeven (tax in = tax out). And the fees item includes dropship fees, credit card processing and paypal fees.
So I guess if I don’t set the coupon and shelter kickback too high, I can afford to do that program. Thanks for helping me think it through!
The purpose of this kind of promotion is not to make a big profit (or necessarily any profit) on that first sale. It’s to acquire a new regular customer for the shop.
I could be way off base here, but it’s possible there is more to it.
I agree with what was said so far, but the $5 donation to a shelter adds up. This could make a decent tax write-off for an individual, or possibly for a small business (I’m not a small business owner, so I really don’t know).