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Math Help - Promotion Profitability Calculator

  1. #1
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    Promotion Profitability Calculator

    Hopefully some of you can help me out...

    One of the features I want to build into my website is a "Promotion Profitability Calculator" for businesses.

    The website is going to launch catering exclusively to restaurants, bars and street food vendors, so having a calculator that helps businesses in the food service industry create profitable promotions is most important; however, eventually we're going to cater to a lot of other businesses as well, such as cleaning services, clothing stores, florists, courier/delivery services, dry cleaners, printing services, day spas, hair stylists/barbers, massage parlors, tanning salons, pay day loan services, parking services, grocery stores, fitness centers, golf courses, caterers, taxis, pet services, psychics, astrologers etc., just to name a few... So if a general "Promotion Profitability Calculator" would work for all of the above, that would be fantastic.

    Basically, what we're looking for is something that allows a business to "play with the numbers" so to speak in order to estimate the potential profitability of a percent-off, dollar amount-off or BOGO-type promotion, both in initial new business as well as potential repeat business from new customers (lifetime value?).

    As of right now, businesses will be able to send targeted promotions to consumer users on our website, so the exact amount of consumers who receive the promotion will be known. In addition, businesses can create any type of promotion they wish. They are basically given a text box in which to type out the promotion, along with some suggestions on how to craft the promotion:

    > Get ____% off your entire order
    > Get ____% off an order of $____ or more
    > Get $____ off an order of $____ or more
    > Buy one ___________ at regular price, get a second ___________ of equal or lesser value free
    > Buy one ___________ at regular price, get a second ___________ of equal or lesser value for half price

    They're pretty much free to craft whatever promotion they want from there. In addition to the promotion suggestions, we think a valuable feature would be to have this "Promotion Profitability Calculator" thing, allowing businesses to enter various numbers to help them pick the best promotion for them.

    Having the exact number of consumers who will receive the promotion is a starting point. Numbers a business can play with might be:

    > How many promotions might be redeemed
    > How many first-time customers might become regular customers
    > How often a new regular will patronize the business over their lifetime (lifetime value?)
    > Average revenue per customer paying full-price
    > Average cost of goods sold per customer
    > Promotional discount amount

    Playing with these numbers should help a lot of small businesses arrive at a good estimate for a profitable promotion, as opposed to blindly following what their competition is doing, or getting talked into a deep-discount by a daily deals provider. If a business wants to go ahead and offer a 50% discount, great, but we want to give them a general idea of what to expect.

    I probably left out a lot of important details that would help make such a calculator even more valuable, but that's why I'm here, asking you guys for help. One of my employees posted the question on Quora, and I think we got a pretty good answer, but it was still rather confusing based on what we're going for - a calculator that makes figuring out the potential profitability of a promotion as simple and, dare I say "fun"?, as possible.

    Thanks for any help you might be able to provide.

    Adding to this I would like to show you what we know now

    Credits to : Daniel McLaury - Quora

    C = cost of meal

    P = price of meal

    S = average size of party

    X = number of exposures

    D = percentage demand function

    So if D(15%) = 6%, then a 15% off coupon will bring in 6% of the people who see it.

    We can imagine three kinds of people who will see the ad: People who, if they enjoy their meal this time, will come back later. People who just want the discount. (If you want to be charitable, you can think of these as people who can't afford to eat at your restaurant all the time. That would represent a lot of people who come out for restaurant week.) People who aren't coming in, no matter what -- maybe they live in French Guyana, or maybe they're vegans and you run a pulled pork hut.

    So let's say that the population of the site you're advertising on is divided in such a way that q1, q2, and q3 represent the percentages in each group, and let D1, D2, and D3 represent the percentage demand function for each group. (So q1 + q2 + q3 = 100% and D3 is the zero function -- even if you give a 100% discount, these people won't come in.)

    Let's also assume that your food is really, really good, so that everyone in group 1 who comes in will come back for more. You could also estimate a percentage of customers who give you repeat business and multiply this in. Realistically, there is probably some correlation between people's standards for food and how much of a discount they require to try your restaurant, but we'll neglect that for the time being.

    N(p)=X(q1D1(p)+q2D2(p)))S is the number of customers you'll get, R(p) = p P N(p) is your revenue, C(p) = C N(p) is your cost, and q1XS customers will return.

    Now we just want to know if there are other ways to to do this same thing. Maybe one easier and needs less data to input or one that gives more useful output data. Thanks
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  2. #2
    MHF Contributor
    Joined
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    Ottawa, Canada
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    Re: Promotion Profitability Calculator

    Hope someone deletes this!

    As was done here:
    Finance/Business Math
    Last edited by Wilmer; January 9th 2012 at 05:50 PM.
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