Does the price cut earn back the margin it gives away?
A four-week price promotion that lifts units by half and still loses money more often than not. The model separates the units you sold from the units you were always going to sell, and prices the ones you simply borrowed from next month.
Marketing Intermediate Monte Carlo Pro engine
After you install, this is the model to open.
Will the Promotion Pay For Itself?
- In your spreadsheet, click the Sortia icon in the strip of icons down the right-hand edge. No strip? Click the arrow at the bottom-right to open it. You can also use Extensions, then Sortia, then Open Sortia.
- Click Start from a template and put that name in the search box.
- Pick the card with that name and click Load this template. It arrives on a new tab with real numbers already in it.
This one runs on a Pro engine, and every free install includes five full-quality runs on your own numbers, shared across all five Pro engines rather than five for each. After that, Pro is $199/year.
The answer
- Extra units sold
- 9,806 on average, positive in every one of 20,000 trials
- Net gain
- -$6,172 mean; the median trial loses $7,562
- Chance it loses money
- 66% a coin flip weighted against you
- Margin given away
- 26% a 12.5% price cut takes $11.60 a unit to $8.59
A single line goes from $24.00 to $20.99 for four weeks. The price is 12.5 percent off and the margin is 26 percent off, from $11.60 a unit down to $8.59, and that asymmetry is the whole sheet: a modest-looking price cut takes twice as big a bite out of what you keep. It means the promotion has to sell 35 percent more units before it has earned back the margin it gave away, and that is before anything is pulled forward.
Three things are uncertain. The uplift, from 20 to 110 percent with 55 most likely. The share of the extra units that were simply bought early, from 10 to 45 percent. And the baseline itself. Click Run. The extra units are never in doubt: about 9,700 on average, positive in every trial, and that is the number the promotion report will lead with.
The money is a different story. Net gain averages about minus $6,600, the median is about minus $8,000, and the loses-money flag comes back at 0.66. The cautious P5 is about minus $32,600 and the P95 about plus $24,600, so the honest description is a coin flip weighted against you, on a line whose unit sales rose by half. The tornado is the useful part.
Uplift dominates, pull forward is a clear second, and the baseline barely registers. Now the second run, which is where this template earns its place. Pull forward is the only input on this sheet that nobody in the business has ever measured, and it is doing the damage. Set it to a triangular 0.02, 0.08 and 0.16, which is what the data looks like when a promotion genuinely recruits new shoppers rather than moving the same shoppers earlier, and run again: net gain turns positive at about $13,800 and the loses-money flag falls from 0.66 to 0.30.
Nothing about the price, the cost or the uplift changed. The whole answer sat in a number that was never on the promotion sheet in the first place. What the model cannot tell you is whether the promotion bought you anything beyond the borrowed units: it counts no new customers acquired, no basket built around the promoted line, and no competitive damage done, all of which are real and none of which is in these figures.
To make it yours, take the baseline from the eight weeks before the last time this line ran, take the uplift from that same event rather than from the plan, and go and measure pull forward once, by watching the four weeks after a promotion ends.
The model
It arrives on a tab called Template: Will the Promotion Pay For Itself:
| Baseline units sold per week | 4200 |
| Weeks on promotion | 4 |
| Normal price ($) | 24 |
| Promotional price ($) | 20.99 |
| Unit cost ($) | 12.4 |
| Uplift on baseline units | 0.55 |
| Share of the extra units pulled forward from later weeks | 0.25 |
| Units sold during the promotion | 26,040 |
| Units that would have sold anyway | 16,800 |
| Extra units | 9,240 |
| Margin per unit at the promotional price ($) | 8.59 |
| Margin per unit at the normal price ($) | 11.6 |
| Margin earned during the promotion ($) | 223,683.6 |
| Margin those weeks would have earned at the normal price ($) | 194,880 |
plus 5 more rows on the sheet.
Once it is in your sheet
- The model arrives with real numbers in it and runs as it stands, so you can press the button first and understand it second.
- Change the numbers to yours. The sheet marks which cells are inputs and which hold formulas, and most labels carry a note explaining the row.
- Press the run button at the bottom of the panel. It is labeled for the tool you are in, and the result lands on its own tab, with a written reading of it beside the figures.
Never used Google Sheets? Start here goes the whole way, in seven steps, and assumes nothing.
Next question
- How many invitations does sixty replies take?Pull the People to Survey
- How much is riding on your one big channel?What If the Ad Platform Changes the Rules?
- Did the campaign really move the brand tracker?Two Big Samples, One Real Difference?
- Which media split buys you the most orders?Three Media Plans, Compared
- Which client should you turn down?Which Retainers Fit the Team We Have?
- Would three extra days move your critical path?What Sets the Go-Live Date?
Every model like this one, and the method behind them: Monte Carlo simulation.