You know, it seems like everyone is trying to get a piece of the small business income stream. I don’t know how it is for you but everyday there are people knocking on the door and trying to figure how to divert our income into their pocket.

Like those daily deal websites. They want to offer your products at a substantial discount to the customer, who buys the deal on the website. The website wants to split the proceeds equally but we have to pay for the transaction fees. Let’s say that the deal is the customer can buy $50 worth of merchandise from your store for $25.00. The website promotes the deal and gets ½ the proceeds, meaning that they would get $12.50 for every deal coupon that they sell and you get the same, except you pay all the credit card transaction fees. Those, of course, are running about 3.5 to 5%. How much of an increase do you have to have to cover the cost or break even with this promotion? Could you run a similar promotion and keep more of the money? Are you gaining any new customers from that promotion?  How many new customers will it take to make up for the cost?

So, if your average margin on merchandise is 50% then when the customer uses the deal coupon on a $50.00 item then they are getting it for cost. You make no money on the transaction. In fact, you only got $12.50 minus the transaction fee and that doesn’t cover the cost of the item. The coupon sale cost you $37.50 in lost margin dollars and part of the wholesale of the item. We have used a breakeven figure of $8.50 as a multiplier to figure what we had to sell to make up for stolen items or tools or some other cost that doesn’t add directly to sales. $37.50 times $8.50 is $318.75, that is the amount you would have to have in additional sales just too breakeven on the cost of the “deal” coupon.

Let’s say that the customer uses the coupon on a number items and the total is $200.00. Now you receive $150.00 and a $50.00 coupon as your income. At a 50% margin the cost of the items would be $100. In this transaction the coupon sale still cost you $37.50, the $25.00 the customer got and the $12.50 the website got, but you covered the cost of the items and made $12.50 in margin dollars. Multiplying 37.5 by 8.50 you still get $318.75, however, subtract the $12.5 from this and you get $306.25. You would need to sell another $306.25 to break even on the coupon.

Is there a good reason to consider such a deal? Would you get enough exposure to justify the cost? Maybe consider it an advertising cost?

I don’t know maybe there is some value there. I think you can create a “coupon” deal within your own organization that offers the customer a nice deal and keeps much more money in your pocket. Consider a “10% or 20% of your purchase” back that can be used towards another item. If you sold $100 worth of items and gave back $20 to be used against another item. If they then buy another $50 and used the coupon you would net $30 on the sale. If you multiply $20 by $8.5 you get $170. You still have to add sales to breakeven but it is much less and all the money comes to you, plus it encourages additional sales.

Just something to think about, those margin dollars are hard to get and it can be very easy to give them away.  How do deal with this?

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