It takes a big sales lift to maintain total profits when discounts are deep.

Seeking to establish its very own shopping holiday, Amazon is heavily promoting its second-ever Prime Day this July 12th. Their main pitch to get consumers to shop more are the huge number of deals that Amazon and its third-party merchants will offer.

While Prime Day is Amazon’s holiday, the idea originated elsewhere. Amazon’s much bigger Chinese competitor, Alibaba, launched Singles’ Day (November 11th) in 2009 as a day for unattached individuals to buy themselves a special treat. It worked. In 2015, Alibaba sold over $14 billion dollars on 11/11. That was almost five times larger than 2015’s Cyber Monday sales across all ecommerce stores in the US.

Nonetheless, the first Prime Day was a great event for Amazon. ChannelAdvisor estimated that Amazon’s sales increased 93% on Prime Day. Our own data showed an 81% increase. Other reports showed that FBA [Fulfillment By Amazon] sellers saw a 300% increase on average.

In spite of the large jump in revenue, discount holidays like Prime Day have a hidden dark side for brand and retailers. Sellers often make less money because of lower margins. To demonstrate a few scenarios, I’ve made a simple calculator that shows just how much of a revenue boost you’ll need to be better off after a discount.

Download the calculator here

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To develop our guidance for Prime Day 2016 we studied our numbers from last year, the level of discount our client retailers would have had to offer to gain extra visibility, and the sales lift required to break even. Here is what we found.

  • In 2015, our clients ran very few discounts on Prime day and saw revenues 81% higher than a normal day
  • The highest-reported sales growth numbers we found was 300%
  • We made a calculator that accepts each product’s price, cost of goods sold, and fulfillment costs so we could evaluate each product individually.
  • The size of the discount available on Amazon’s Lightning Deals page ranges from 15-60%

As an example, the graph below shows the lift a retailer or brand would need to see from a 30% discount to break even. For instance, at 30% off, Product 1 would have to see an increase in sales of 530% to generate the same total margin as normal sales volume at a normal price.

Product 4 would lose money if we discount by 30% so the graph shows no bar to show that no amount of lift in sales will be beneficial at 30% off.

Of course, every product is different and Prime Day is a new phenomenon, so your results will vary. That’s why I made a calculator. Don’t assume that our clients’ product margins and results from a year ago will dictate your results in 2016.

Download the calculator and input some of the products you plan to discount and try it with different discount levels. How much lift do you need to make it a winning proposition?

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DNA Response is an agency that helps retailers and brands sell on online marketplaces like Amazon.

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