Kit Kat Case Study – Promotion Calculator

Promotion Calculator Kit KatPromotions are part of our normal day-to-day activities at a convenience store. Customers expect promotions and they are a great tool for creating some excitement and novelty at a site.

The objective of a promotion is not always to generate the same profit as before, it could also be to launch a new product, increase units sold or to give customers a “new” reason to visit your store. It could also be to show your customer that they get extra value when visiting your business.

But, we must not forget that promotions impact the bottom line and although we might accept this, we still need to be very clear on exactly what that impact is.

We will use a Kit Kat 4 Finger promotion as an example. Here are a few points to consider:

  • Download the Promotion Calculator (we have included the Kit Kat example in the calculator, but you can change the values for any product you want to calculate)microsoft-excel-logo
  • In our example:
    • We are buying Kit Kat 4 finger t R5.80 ex VAT and selling it at R9.95
    • We are making R3.34 profit at a 33.55% margin for each unit
    • Our promotion will be at R6.95 and we are able to buy in stock at a reduced price of R5.35
    • On promotion we are making Ro.85 profit at a 12.24% margin for each unit
    • We need to sell at least 392 units at the promotion cost and selling price to make the same profit as usual
    • Our profit target for this promotion is R333.80
    • Our unit target for this promotion is 392 units
  • It is important to note that all the Kit Kats we sell during the promotion must be at the promotion COST price of R5.35, otherwise we will not make the profit target we have set (R333.80)
  • If we buy in only 5 boxes of Kit Kat at the promotion price of R5.35 a unit and during the promotion we sell out all the stock we have, we will sell all our stock at the promotion RETAIL price, but not all the stock at the promotion COST price
    • We will sell 200 Kit Kats (5boxesx40) at R0.85 profit and the rest (192) at R0.34 profit.
    • We lose the potential profit of selling the 192 Kit Kats at the promotion COST price. I.e. 192 units at R0.51 profit = R97.92
    • This may not be a lot of money in our example, but multiply this by all the promotions you run every month and every year
  • To avoid this problem you can do the following:
    • At the start of your promotion, take all the stock on the shelf that was bought at the normal COST price and store it separately in the store room so you cant sell it during the promotion
    • Or, if you are concerned about expriy dates, when buying in at the promotion COST price, make sure you put some boxes of the new stock aside equal to the amount of units you have on the shelf at the normal COST price

Another important point to note is:

  • Apart from the stock you had on the shelf before the promotion, any stock left over at the end of the promotion will be sold at the normal price.
  • In our example, this means that any Kit Kat bought at the promotion COST price (R5.35) will be sold at the normal RETAIL price (R9.95) which implies your profit on those items will be R3.85 instead of the normal R3.34
  • Your profit margin on those items will increase from 33.55% to 38.69%

One of the critical tasks that your back office manager should be doing is to calculate the effect of promotions and to work with the operations manager to ensure that the right quantities of stock are ordered.

We understand that you may have a dozen or more products on promotion at any given time and to make all those calculations every month could be problematic. Our suggestion is to focus on the big volume items.

Also, it is important to note that we cannot do away with promotions. They are a necessary part of convenience retailing. Without them we would get no traction from new items and potential customers won’t visit our stores. But, you need to make sure that your administration and ordering is handled well so that you don’t loss profit unnecessarily.

A final note – REMEMBER that product promotions on well-known products such as Coke, Chips, Chocolates, etc normally drive volumes way above normal. This means you could actually be making a better profit by running the promotion than just selling the product as normal. We would advise you to go all the way with every promotion, build’em high and watch’em fly.

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