Understanding BFCM Discounting: A Simple Calculator
November 14, 2023
It’s that time of year. The eComm bloodbath of Q4 has begun and it feels like your competitors have been running Black Friday sales since August. With the Superbowl of eComm coming up you sit down with your team to do some planning and the ultimate question is - "What's our BFCM offer?”
The implications surrounding your BFCM offer can be mostly solved with one easy model, which we will get into in a second.
But first, it’s silly to assume that your gross revenue will be the same if you run a discount versus if you don’t. Generally speaking, unless your offer sucks, a discount will result in higher gross revenue. And more customers will be acquired from the high CVR.
Additionally, let’s assume that marketing budget is set in stone, and we are trying to maximise profit with the budget given. Here is a google sheet (please create a duplicate if you want to change around the numbers) with a simple scenario model that we can walk through now
Starting with Sales: We would generally expect your gross MER (gross revenue / ad spend) to go up if you are running a discount. So, let’s hold our marketing budget constant at $400k and assign a gross MER variable for a scenario where we discount and a gross MER variable for when we don’t discount:
Ok, so we can see that we are going to end up with higher gross sales, and therefore more customers acquired when we do a discount on our $400k marketing budget. That said, you’ll also notice that net revenue is actually the same.
The key difference in these two scenarios so far is actually COGS. In our discounting scenario, we sold more stuff, but ultimately pulled in the same amount of net revenue after giving up discounts. COGS is based on gross sales because well, we still sold that stuff. So your gross margin is actually compressed meaningfully when you account for discounts - 50% vs 33%:
So now we are sitting at this gross profit number that’s a bit less than what we probably would have generated if we didn't discount.
No problem, we knew we were going to be giving up gross profit in return for marketing efficiency and customer acquisition. After all, that’s the point of a discount.
Now let’s deduct marketing and compute a contribution margin: We can see that when we discount 25%, we actually are making less contribution margin, or as we like to call it when we're trying to sound smart: net variable cash flow.
Ok, so it’s settled right? We should ditch the discount.
Well, not so fast. We need to go one step further and look at some other factors before we decide, namely customer acquisition.
Under these assumptions, we actually are going to acquire over 10,000 more customers, with the same marketing budget!
So, what are we trying to say here?
Well, we're presenting two possible scenarios. Take 200k in net variable profit, or break even and acquire a massive cohort of users? The answer to that question lies in your retention curves, business goals, cash on hand, working capital constraints, and a bunch of other stuff that we don't have room for here!
Anyways - open this calculator, duplicate it and change all the blue numbers to fit your specific business. You make the decisions for yourself as alas, only you can answer the question: is discounting your cash flow friend or foe?