A Budget for Discounts?
Drilling Down Newsletter #95 12/2008
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This month, we take a look at improving the Productivity of a
Discount budget. We'll have a little conversation with Finance
and delve into the mysteries of the Income Statement, an area I find
many folks, especially in the Online Advertising area, are not too
Over on the blog, I attended the NCDM show this year to moderate
a panel. While I was there, I tried to discern what the hot
buttons will be this year for Database Marketing folks.
Keeping it light for the holidays, let's get to it...
Sample Marketing Productivity Blog Posts
08: What was Hot?
December 12, 2008
With two very intense days of 5-track sessions going at NCDM 08, it was difficult to pay attention to everything that was going on.
Still, by picking up handouts from sessions I did not go to, I could get a sense of what the hot topics were this
Continue reading on the blog:
08: What was Hot?
and feel free to leave comments.
Questions from Fellow Drillers
A Budget for Discounts?
Q: For the first time ever, we have a Discount budget
built into our financial plan. We've been told this number in
the budget is less than we used last year, but our Sales target is a
bit higher. We're supposed to hit our sales
targets while at the same time not going over budget with our
Discounts to generate those sales. This directive comes from
A: You have just been offered the opportunity to
graduate from Advertising to Marketing!
Q: We are fairly sure if we reduce the discounts we
give, response is going to fall and so are sales, especially
from best customers. Or we could keep the same discounts but do
fewer discount promotions, with probably the same effect on
sales. Are there any other alternatives, any ideas on how to
manage this discount budget issue? We're online only.
A: Sure, ask an easy one over the holidays!
Seriously, I hope you did not take my comment about graduating from
Advertising to Marketing the wrong way. This is really an
opportunity for you to shine in so many ways, and to learn a lot of
new ideas in the process - if you want to take advantage of
The question at hand here is really this: How do I maximize the
Sales Dollars I get from each Discount Dollar I spend? In other
words, How do I improve Discount Productivity?
You've been given a more global directive that opens the door for a
Strategic role. Rather than just pumping out ads, you could now
accept Corporate responsibility - Profits.
You can take advantage
of this opportunity for more responsibility (and compensation?)
1. Using this issue as an opportunity to build a strong bond
with Finance, which has a lot of benefits now, and in the future
2. Prove that you can take on a more global challenge like
this, and win
Let's talk through the idea of a discount budget for a
moment. Why would Finance want to have a discount budget?
They want to boost Gross Margin, the amount of a Sale that goes
towards paying the bills. Why do they need to do this?
Well, a good deal of the increases in online commerce profits in the
past have come from organic growth, the natural growth of online as a
function of more people being online and increased usability
of web sites.
Now, in what is probably a flat Sales environment, if you want to
increase Profits, you cannot rely on organic growth anymore. So
you have to figure out how to cut costs, and in commerce, one way to
do this is to reduce the amount of discounting going on.
Now, here is where it gets tricky. There are generally two
kinds of discounting that occur in most commerce businesses:
1. Discounts / Coupons - usually customer level in nature,
driven by Marketing, used to increase sales volume
2. Markdowns - usually product level in nature, driven by
Merchandising, to increase inventory turn / make room for new products
Now, you can certainly implement a single campaign that hopes to
accomplish both goals, but that's not the point. The point is,
as a Marketer, and concerned with customers, you would not always
choose to do the same kind of discounting that a Merchant
For example, a focus on promoting "dog" product that
people don't want to buy at most any price. Your
Objective as a Marketer is different than the Merchant, you care about
customer experience and satisfaction, right? Not moving dog
product out the door?
And this issue of the difference in Objectives for
discounting is what swings open the door for a talk with the
good folks in Finance. If you're a junior person, it opens the
door for your boss. If you're a Marketing analyst, it opens the
door for a most exciting project.
What is this little talk with Finance about?
1. What is the real reason for discount budget, what is
the target metric?
2. Is this discount budget for Discounts to customers only and
not inclusive of Markdowns on products?
The first question drives to clarity of Objective, the second to
the issue of potentially being Accountable for something you are not
Responsible for, that you don't Control.
Discounts can drive Sales, they can drive Gross Margin, they can
drive New Customers, depending on how they are targeted. You
can't normally do all three. So the first thing you want to talk
with Finance about is the true Objective of this discount budget.
"Look folks, what is the bogie we are trying to hit
here? I'm all in for the idea of a Discount budget, but hey, let
us help you accomplish your goal. What is the number we're
trying to improve, let's talk about how to get there".
I suspect they are looking at Gross Margin Dollars, but it could be any
number of things, depending on the business model. The point is
to clarify what metric it is they are looking at and then to make sure
you know what goes into it so you know what role you play.
Which brings us to point number 2: if they're talking about Gross
Margin Dollars, that's a number that probably includes the Markdowns from
the Merchant side, as well as (probably) other charges.
Now you're up to at least two inputs you don't control
on your side of the equation.
"OK, Gross Margin Dollars it is, we agree on a target and
we'll use the Discount budget as a rule of thumb on getting
there. But here's the thing I want to be clear on, how do you
get to a Gross Margin Dollar from a Sales dollar? Because we're
responsible for Sales and Discounts, but I'm not sure we're
responsible for some of the other variables that go into Gross Margin
Dollars. So I just want to make sure we're talking apples to
Let's say that Finance knows what they're doing and have created a
Discount budget for you that only has Customer Discounts in it. This
means the Gross Margin Dollars target is a shared one; both Marketing
and Merchandising have a horse in the race for this Objective.
Which brings up the question of Allocation - since the target is
shared, how did Finance decide how much to allocate to Marketing /
Customer discounts and how much to allocate to Merchandising / Product
Because that's the discussion you (or your boss) should have been
in on. This is the very heart of the matter, the difference
between being in Advertising versus Marketing. It's a seat at
the table when this kind of discussion goes down. I'd bet the
head Merchant was in on this discussion - if there was a discussion.
"Listen, I wonder if I could ask you something. With
this Discount budget, it's going to be tough to drive sales volume
like we did last year. You know that, right? At the same
time, we sell lines that the Merchants are always Marking down to get
rid of. It seems like a waste of the Company's time and effort to promote those
products. Besides, the same lines have high Return Rates and
this harms the Customer Experience with our Company. If we stopped
selling these lines, wouldn't Gross Margin Dollars increase?
Then we could use some of that increase to make sure we hit Sales
targets with Discounts. What do you think of that idea? Could we do some
analysis on Markdowns and maybe fine-tune this Discount budget by
getting the Merchants to commit to reducing them?"
When you know:
1. What this Discount budget is exactly, what the end target
Finance has in mind really is
2. That you are really responsible for and in control of the
Dollars it represents
3. All efforts have been exhausted outside Marketing to bring
other players to the table and contribute to attacking this GM$ issue
Then you are ready to work on maximizing the Productivity of each
Discount dollar you have.
The way to do that is outlined here.
Welcome to Marketing, where it's not just about Sales and
Campaigns, it's also about hunting down problems in other parts
of the Company that negatively impact Customers so that you can do
your job more effectively.
Have a question on Customer Valuation, Retention, Loyalty, or Defection?
Go ahead and send it to me here.
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Marketing program designs, click
That's it for this month's edition of the Drilling Down newsletter.
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'Til next time, keep Drilling Down!
- Jim Novo
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