Course contents
Practitioner · Course 4: Markdown, Promotion and Terminal Stock · Lesson 2 of 5

Planning a promotion without damaging full-price sales

Level: PractitionerTime: 45 minutesOrder used: A (the T-shirt, Northline Apparel export order, made at Delta Garments, sold wholesale to Fairway Stores)Tool: Markdown and terminal stock worksheet
For a buyer or retail planner sizing a promotion, and for a factory asked to help fund one. You need lesson T20-C04-L01. Figures are teaching examples in US dollars.
BuyerFairway Stores
Export orderOrder A, 15,000 T-shirts
Promotion3-day, 10% off shop price USD 19.90, sell-through still on plan
Factory requestCut Delta Garments' own FOB by USD 0.20 on a 900-piece reorder
Standard FOBUSD 3.20 = fabric 1.15 + trims 0.20 + making 1.10 + overhead 0.49 + profit 0.26
What this lesson measuresWhether a promotion's own volume outweighs full-price sales pulled forward
02Opening

This page explains how to size a promotion so its own extra volume outweighs the full-price sales it pulls forward

This page is for a buyer or retail planner sizing a promotion, and for a factory asked to help fund one. At work, a person can run a promotion and only see that stock moved faster, without checking how many units would have sold at full price anyway with no discount at all. This lesson mainly teaches the money flow: it works out, using Order A's own fixed shop price, exactly when a promotion's own extra volume is worth more than the full-price margin it gives up.

A promotion differs from a markdown covered in the last lesson: it runs while a style's own sell-through is still on plan, to build extra volume, not to react to a shortfall. Fairway Stores runs a short promotion on Order A mid-season, and Meridian Sourcing then asks Delta Garments, the factory, to cut its own FOB price on a small reorder to help fund it. Without this skill, a buyer cannot tell a promotion that grew the season's own profit from one that merely gave away margin, and a factory cannot judge a price request from a promotion it had no part in planning.

03Before you start

What you need, and what this lesson does not cover

You need: lesson T20-C04-L01, which shows how a buyer judges whether a style's own pace of sale needs a markdown.

By the end of this lesson you can:

  • split a promotion's own extra sales into incremental units and cannibalized units;
  • calculate the profit a promotion actually adds once cannibalized units are accounted for;
  • state why a deeper promotion, at the same sales volume, can add less profit than a shallower one;
  • explain why a factory's own wholesale price is a separate decision from a retailer's own promotion, even when the retailer asks the factory to help fund it;
  • avoid judging a promotion's success only from how many units it moved.

Not covered here: what a style's own terminal stock says about a season's original plan, covered in the next lesson of this course (lesson T20-C04-L03).

04Key terms

Words you will meet in this lesson

TermMeaning
MarkdownA reduction in the shop price of goods that have not sold as forecast, used to clear the remaining stock.
Sell-through rateThe share of stock actually sold within a planned period, used to judge whether a forecast was right.
MarginProfit divided by the selling price, shown as a percentage of what a company sells for.
FOB (free on board)The factory delivers the goods on board the ship at its own port. Freight from there is the buyer's cost.
Wholesale priceThe price a brand charges when it sells the finished goods on, for example to its own retail arm or another retailer.
05Teaching
The rule

A promotion is worth running once the profit its incremental units add is greater than the full-price margin given up on the units it merely pulled forward

Not every unit a promotion sells is a unit that would not have sold otherwise. Some units are incremental, sold only because of the discount, in a window they would not otherwise have sold in. Other units are cannibalized: they would have sold at full price anyway, in that same window, and the promotion simply moved them to a lower price for no real gain in volume. A promotion adds real profit only when the incremental units' own profit is greater than the full-price margin given up on the cannibalized units.

Fairway Stores' own margin given up per cannibalized piece at a 10% promotion on Order A: 19.90 x 10% = USD 1.99
What you meet in real life

A promotion takes different shapes depending on the order's own market, model and who is asked to help fund it

A buyer or factory meets several shapes of this decision across a normal working year, and each depends on the order's own booking and who bears the cost.

What can differThe shapes you will meetWhy it matters
Export order, hybrid pre-booked and replenishmentFairway Stores runs a short promotion on Order A mid-season while its own sell-through is still on plan, and the promotion's own reorder can draw on the hybrid order's own remaining replenishment volume.A hybrid order gives a buyer stock already planned for replenishment to use for a promotion, without a fresh production order.
Domestic Make to Stock style promoted ahead of a competitor's own saleA domestic buyer such as Cedar & Co. runs its own short promotion to build volume before a rival's own sale date, while its own sell-through is still healthy.A domestic promotion is timed against the market calendar, not against a hybrid order's own replenishment schedule.
Factory asked to fund part of a promotion through its own wholesale priceMeridian Sourcing asks Delta Garments to cut its own FOB price on a reorder to help fund Fairway Stores' promotion.A factory's own wholesale price is agreed separately from a retailer's own promotion; a factory can decline to subsidize a retail-side decision it had no part in planning.
A promotion timed too close to a style's own natural markdown pointA promotion run only a week or two before a style would need its first markdown anyway risks discounting stock twice in quick succession, confusing the two events.Running a promotion and a markdown close together makes it hard to tell which discount actually cleared which stock, and can double-discount the same units.
The case we follow

Fairway Stores runs a 3-day, 10% promotion on Order A while its own sell-through is still on plan

Fairway Stores plans to sell Order A's 15,000 pieces evenly across its own 10-week season, an average pace of 1,500 pieces a week. Mid-season, while sell-through is still on plan, it runs a 3-day promotion at 10% off the USD 19.90 shop price, a sale price of USD 17.91. In a normal 3-day window, Fairway Stores would expect about 600 pieces to sell at full price on its own usual pace. During the promotion, 1,500 pieces actually sell: 600 of those would have sold anyway at full price, and 900 are extra volume the discount itself pulled in.

Promotion-window sales split into cannibalized and incremental pieces600 cannibalized, would have sold anyway900 incremental, new volume from the discount
900 of the 1,500 pieces sold are genuinely new volume; the other 600 would have sold at full price anyway. Only the incremental pieces are a real gain; the cannibalized pieces simply moved to a lower price.
The worked number

Calculating the profit a promotion actually adds once cannibalized units are accounted for

Fairway Stores' own profit per piece at the promotion price of USD 17.91: 17.91 - 8.00 = USD 9.91
Profit added by the 900 incremental pieces, sold only because of the promotion: 900 x 9.91 = USD 8,919
Margin given up on the 600 cannibalized pieces, sold at USD 1.99 less than full price: 600 x 1.99 = USD 1,194
Fairway Stores' own net profit gain from the promotion: 8,919 - 1,194 = USD 7,725

The promotion adds USD 7,725 to Fairway Stores' own profit, because the profit earned on the 900 genuinely new units is far greater than the margin given up on the 600 units that would have sold at full price without any discount at all.

The method

Five steps to size a promotion so it adds real profit rather than merely discounting sales that would have happened anyway

  1. Estimate how many pieces would sell in the promotion window at the style's own normal, full-price pace.
  2. Record how many pieces actually sell during the promotion.
  3. Split that total into cannibalized pieces, the normal-pace estimate, and incremental pieces, the rest.
  4. Calculate the profit added by the incremental pieces and the margin given up on the cannibalized pieces.
  5. Compare the two: run the promotion only if the incremental profit is greater than the margin given up.
The trap

A common mistake is judging a promotion's success only from how many units it sold, without splitting out cannibalized volume

A common mistake is treating every unit a promotion sells as a win, without checking how many of those units would have sold anyway at full price. What this costs a buyer who gets it wrong is a promotion that looks successful on total volume but actually reduces the season's own profit, because the margin given up on cannibalized units outweighs the profit the truly incremental units add. A related mistake is assuming that a deeper discount, at the same total volume, adds the same profit as a shallower one; it does not, because a deeper discount gives up more margin on every cannibalized unit for no extra incremental gain.

Net profit added at a 10% promotion depth compared with a 20% depth, same volume10% promotion depthUSD 7,725 net profit added20% promotion depth, same 900/600 splitUSD 4,740 net profit added
A 20% promotion adds USD 2,985 less net profit than a 10% promotion at the same volume. Going deeper than the incremental volume actually requires only gives up more margin on the cannibalized units.
06In plain words

A promotion is worth running once the profit its new sales add is greater than the margin given up on sales that would have happened anyway at full price. Not every unit a promotion sells is a real gain: some are incremental, genuinely new, and some are cannibalized, pulled forward from sales that were already coming. A promotion that looks successful by total volume can still shrink a season's own profit if the cannibalized share is large or the discount is deeper than it needs to be. A factory's own wholesale price is a separate matter from a retailer's promotion, and a factory can decline to fund a retail decision it had no part in planning.

07Quick check
  • A promotion's incremental units are new sales the discount itself created; its cannibalized units would have sold anyway.
  • Profit added equals the incremental units' own profit minus the margin given up on the cannibalized units.
  • A deeper discount, at the same volume, adds less profit than a shallower one, because it gives up more margin on cannibalized units.
  • A promotion runs while sell-through is still on plan; a markdown reacts to stock already behind plan.
  • Running a promotion too close to a style's own markdown point risks discounting the same stock twice.
  • A factory's own wholesale price is a separate decision from a retailer's own promotion funding.
08Workplace scenario

Meridian Sourcing asks Delta Garments to cut its own FOB price to help fund Fairway Stores' promotion

To restock the 900 incremental pieces Order A's promotion sold, Meridian Sourcing asks Delta Garments for a 900-piece reorder. It also asks Delta Garments to cut its own FOB price by USD 0.20 a piece on this reorder, to help fund the promotion's own discount.

  • Delta Garments' standard FOB on Order A is USD 3.20 = fabric 1.15 + trims 0.20 + making 1.10 + overhead 0.49 + profit 0.26.
  • A USD 0.20 cut would take Delta Garments' own profit on this reorder from USD 0.26 a piece down to USD 0.06.
  • On the 900-piece reorder, that cut removes USD 180 of Delta Garments' own planned profit, out of a planned USD 234.
  • Fairway Stores' own promotion discount, USD 1.99 a piece, is already fully funded from its own retail margin, without needing any change to the wholesale price.

Here is the request Meridian Sourcing actually sent Delta Garments:

Reorder request to Delta Garments. 900 pieces, Order A specification, for Fairway Stores' own promotion restock. Requested FOB: USD 3.00 (a USD 0.20 cut from the standard USD 3.20), to help fund the promotion's own retail discount.

Should Delta Garments accept the full USD 0.20 cut on this reorder? Decide before opening the answer.

Show decision

No, not the full cut. Two facts already in the request decide this.

First, Fairway Stores' own promotion discount is already fully funded from its own retail margin. The USD 1.99 a piece given up on cannibalized units, and the profit added by incremental units, both happen entirely inside Fairway Stores' own shop price; nothing about the promotion's own arithmetic requires a change to Delta Garments' wholesale price at all.

Second, a USD 0.20 cut removes most of Delta Garments' own planned profit on the reorder. Profit per piece would fall from USD 0.26 to USD 0.06, a reduction of 77%, for a promotion Delta Garments had no part in planning and does not share in the upside of if it succeeds.

Delta Garments should decline the full USD 0.20 cut. It may still choose to offer a smaller accommodation if the ongoing relationship justifies it, but the promotion's own funding belongs inside Fairway Stores' own retail margin, not the factory's wholesale price.

09What it costs

What the requested price cut would cost Delta Garments, and what a deeper promotion would cost Fairway Stores

Delta Garments' own planned profit on the 900-piece reorder at the standard FOB: 900 x 0.26 = USD 234
Delta Garments' own profit on the reorder if it accepted the full USD 0.20 cut: 900 x 0.06 = USD 54
Profit Delta Garments would give up by accepting the full cut: 234 - 54 = USD 180
Fairway Stores' own net profit gain if the same volume split were promoted at a deeper 20% instead of 10%: (900 x 7.92) - (600 x 3.98) = USD 4,740
Extra profit Fairway Stores keeps at 10% depth instead of 20%, same volume: 7,725 - 4,740 = USD 2,985

Accepting the full cut would cost Delta Garments USD 180 of its own planned profit, for a promotion it had no part in planning. Going to 20% instead of 10% would cost Fairway Stores USD 2,985 of its own profit, for the same volume sold.

10Working template

Markdown and terminal stock worksheet: split a promotion's own sales into incremental and cannibalized units

Open the course workbook's "Promotion depth" sheet. It records the promotion window's normal-pace estimate and actual sales, calculates the incremental and cannibalized split, and works out the net profit the promotion adds at any given discount depth, so a buyer never has to size a promotion by feel alone.

[Download the Markdown and terminal stock worksheet](../../templates/T20-C04-markdown-and-terminal-stock-worksheet.xlsx)

Download the Markdown and terminal stock worksheet (Excel)

11Check yourself

1. A domestic style normally sells 200 pieces a day. During a 2-day promotion at 15% off a USD 24.00 shop price, 900 pieces sell. How many pieces are incremental?

2. Why can a deeper promotion discount, selling the same total volume, add less profit than a shallower one?

12Glossary
ENARFRTRMeaning
Markdownتخفيض السعرDémarqueİndirim (markdown)A reduction in the shop price of goods that have not sold as forecast, used to clear the remaining stock.
Sell-through rateمعدل البيع الفعليTaux d'écoulementSatış oranıThe share of stock actually sold within a planned period, used to judge whether a forecast was right.
MarginالهامشMargeMarjProfit divided by the selling price, shown as a percentage of what a company sells for.
FOB (free on board)تسليم على ظهر السفينة في ميناء المصنعFOB (franco à bord)FOB (gemide teslim)The factory delivers the goods on board the ship at its own port. Freight from there is the buyer's cost.
Wholesale priceسعر الجملةPrix de grosToptan fiyatThe price a brand charges when it sells the finished goods on, for example to its own retail arm or another retailer.
13Next

Lesson 4.3: Reading terminal stock and what it says about a season's own planning

You now know how to size a promotion so its own extra volume outweighs the full-price sales it pulls forward. The next lesson looks at what a style's stock still unsold at the end of a season says about the season's own original plan. Back to the course map

14Ladder

RecognizeTell an incremental promotion unit apart from a cannibalized one.
ConnectSee how a promotion's own net profit depends on the split between the two.
CompareWeigh a shallower promotion's net profit against a deeper one at the same volume.
DecideJudge whether Delta Garments should fund Fairway Stores' promotion through its own wholesale price.