How to Calculate the Profit from Your Promotions

In this post, we're gonna look at promotion profit. Many of our clients run promotions throughout the year that jumpstart sales during key periods.

The hope is that beyond the short-term sales, these new customers will become long-term customers.

However, the bad thing about promotions is that while sales may spike in the short term, your profit margin will decrease.

Additionally, depending on how frequently you run promotions, you may be training customers to wait until there's a discount which is a hard hole to climb out of.

So, because of all this, it's important to understand the profit that results from your promotions.

So, we'll take a look at how to calculate this.

There's a lot of pieces to this equation, but we'll break it down section by section.

In the first section, you're looking at the incremental

units sold on the “deal” or promotion multiplied by the margin minus the discount. This will isolate how much money you made from having the promotion.

The second section deals with any non-discounted increments sold during that time period multiplied again by the original margin that you normally get. This creates a before and after comparison.

With those two sections solved, you now want to subtract the base units sold on promotion multiplied by the discount. Then subtract your cost of the overall promotion (includes marketing costs, etc.)

The final element of this equation is a bit more subjective, however you could incorporate a promotion-specific NPS score into the calculation.

Either way, the positive versus negative carry over is your take on the value of the promotion overall to your brand and its marketing efforts. Was the response overwhelming or underwhelming? Did social sentiment take a hit? Did it frame your normal pricing as too expensive?

Understanding the intangible impacts of a promotion is just as important as understanding the hard numbers in your results. By understanding the sentiment of your customers you can determine whether or not they

appreciate a promotion and think highly of your brand because of it or if they saw that promotion and it made them feel that you are becoming less of a premium brand or high-quality brand.

What's interesting about running this calculation all the way through is that it separates the baseline sales or what sales were expected in a normal week from the promotional sales.

If your calculation ends up showing a positive outcome like this one down here, then you can see that the promotion was worth it and it should go forward.

If it were negative, you're losing money and it's a bad promotion.

So, beyond the price considerations, this calculation also helps you gauge the psychological impact that a promotion has on your audience since a promotion typically results in a change in your baseline sales number.