What it means
In marketing, promotion covers everything a company does to communicate with its customers and persuade them to act. That includes advertising, public relations, social media, sales events and price-based offers such as two-for-one deals.
The goal is usually to lift sales, win new customers or clear unwanted stock. From a finance point of view, the key question is whether a promotion makes money.
A discount reduces the margin earned on every sale, so extra volume must be large enough to more than make up for the lower margin and for any promotion costs. Many promotions look successful because sales rise, yet they lose money once the cost is counted.
Timing and customer behaviour are the hidden complications. Some shoppers would have bought at full price anyway, so they simply receive a discount for nothing, and others may bring forward purchases they would have made next month, which causes a dip afterwards.
Good analysis compares sales against a baseline of what would have happened without the promotion. Accounting treatment also matters.
Promotional discounts are usually deducted from revenue, advertising costs are normally expensed when incurred, and free goods given away are a cost of sales. Loyalty schemes and vouchers can create a liability if customers hold rewards they have not yet redeemed.
The employment sense of the word has its own financial effect. A promoted employee usually receives a higher salary and may move into a new pay band, so managers need to budget for the cost and be consistent in how promotions are awarded.
In practice
Real-world examples.
Example
A clothing retailer runs a weekend sale with 20% off. Revenue rises by 35%, but the finance team finds that gross profit is lower than a normal weekend because the extra sales were not enough to offset the reduced margin.
Example
A software company offers a free 30-day trial to new users. Of 2,000 sign-ups, 300 convert to paid plans at $50 a month, which produces $15,000 of monthly recurring revenue and pays back the $20,000 campaign cost in under two months.
Example
A manager promotes a senior analyst to team leader. Her salary rises from $70,000 to $85,000, so the department budget increases by $15,000 and the finance team adds the cost to its forecast.
Formula
Calculation
The incremental profit from a promotion compares its results with the baseline:
Incremental profit = (Promotion units x Promotion margin per unit) - Promotion costs - (Baseline units x Baseline margin per unit)
Suppose a product normally sells 10,000 units a month at $20 each with a unit cost of $12, giving a margin of $8 and baseline profit of 10,000 x $8 = $80,000.
A 10% discount reduces the price to $18, so the margin falls to $6. Sales rise to 14,000 units, and the promotion costs $3,000 in advertising.
Promotion profit = 14,000 x $6 - $3,000 = $84,000 - $3,000 = $81,000.
Incremental profit = $81,000 - $80,000 = $1,000.
Sales rose by 40%, yet profit rose by only $1,000, and if volume had risen to only 12,000 units instead, the profit would have been 12,000 x $6 - $3,000 = $69,000, a loss of $11,000 against baseline.Case study
Seen in the real world.
Sunrise Beverages is an illustrative, fictional drinks company that ran a summer promotion offering a 25% discount on its bestselling juice. Sales volume tripled in the first week, and the sales director declared it a triumph.
The finance analyst looked at the numbers more carefully. The usual margin per bottle was $1.20, but the discount cut it to $0.30, and the company's regular buyers had stocked up, so sales dipped for the following three weeks.
Across the whole period, profit was lower than if no promotion had been run. The company redesigned its approach, targeting the discount at new customers through a coupon rather than at everyone. The illustrative lesson is that a promotion should be judged on profit against a baseline, not on the sales spike.
Watch out
Common mistakes.
- Judging a promotion by the increase in sales without calculating the effect on profit after the lower margin and extra costs.
- Ignoring the dip in sales after the promotion ends, which can wipe out the gains from the busy period.
- Offering deep discounts so often that customers learn to wait for them and refuse to pay the full price.
Questions
People also ask.
How do I measure if a promotion worked?
Compare the profit during the promotion with a baseline estimate of what would have been earned without it, including the extra costs and any later dip.
Are promotional costs an expense?
Generally yes, advertising and promotion costs are expensed as they are incurred, while discounts are normally treated as a reduction in revenue.
What is a promotion in the marketing mix?
It is the part of the mix that covers communication and persuasion, including advertising, public relations, personal selling and sales offers.
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