Tuesday 3 November 2009

BOGOF: A fair share of the losses?

Persuading your customer to forego their retail margin on the free item can help, but you both lose money!

This example shows where a retailer and a supplier decide to jointly fund the BOGOF promotion. This means the supplier will supply the free item ‘free of charge’ to the retailer, who in turn offers ‘buy one, get one free’ to the shopper for £10. The supplier makes a normal gross margin of 50% (in other words they can manufacture the product for 50% of the price to the trade). The supplier also makes a normal net profit of 10% on normal sales.
Meanwhile, the retailer makes a normal trade margin of 25% of shelf prices, ex VAT, has handling costs 0f 10% and overheads of 10%, leaving 5% net profit. As you know, state-of-art retailers normally have a net profit of 5% of sales, ex VAT.

In this example, where the retailer gives up his gross margin on the free item, and the supplier provides the free item free-of-charge to the retailer, it can be seen that the retailer loses £0.75 per item, or £1.50 per BOGOF and the supplier loses £1.50 per item, or £3 per BOGOF sold.
Obviously, this means that both parties will lose money on every BOGOF promotion!

See yesterday's post below for when the retailer refuses to forego the retail margin!

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