Fern & Fable: Choosing One Spring Promotion
Fern & Fable runs six garden centers in one metro area. Annual revenue is $9.6 million and contribution margin before marketing is 38 percent. Management is weighing three proposals and can fund only one. A: a 15 percent storewide discount, forecast to raise unit volume 20 percent. B: a loyalty program costing $180,000 in setup and annual operating expense plus a 2 percent rebate on member sales; the director expects 35 percent of current customers to enroll and member spending to rise 12 percent. C: no promotion, and instead $120,000 on local search and email marketing, forecast to add $600,000 of incremental revenue at the same contribution margin. Last spring a similar 10 percent discount lifted volume only 6 percent, and a post-season survey found that 40 percent of the discounted purchases would have happened at full price anyway. The owner wants a decision in two weeks.
1. Evaluate proposals A and B quantitatively and state which, if either, creates value.
Read the worked answer
Baseline: revenue $9.6M × 38% = $3.648M contribution. Variable cost ratio = 62%.
Proposal A. A 15 percent price cut leaves variable cost per unit unchanged, so the contribution rate becomes 1 − (0.62 ÷ 0.85) = 27.06%. New revenue = $9.6M × 1.20 × 0.85 = $9.792M. Contribution = $9.792M × 27.06% ≈ $2.650M. That is about $1.0M worse than the baseline. The forecast is also too generous: last year's 10 percent cut produced only 6 percent more volume rather than the 11 percent needed to break even, and 40 percent of discounted sales were purchases that would have occurred at full price. The discount converts full-margin sales into lower-margin ones, and no plausible volume response fixes that arithmetic.
Proposal B. Member sales = 35% × $9.6M = $3.36M, rising 12% to $3.763M, so incremental revenue is $403,000 and incremental contribution is $403,000 × 38% ≈ $153,000. Costs: rebate of 2% × $3.763M ≈ $75,000 plus $180,000 fixed = $255,000. Net year-one effect ≈ −$102,000. The program could pay back in later years if retention improves, but the proposal offers no evidence of that and the fixed cost is committed up front.
Neither A nor B clears the bar on the numbers presented.
2. Make a recommendation among the three, and explain what you would require before approving it and what would make you reverse the decision.
Read the worked answer
Recommend C. Incremental contribution = $600,000 × 38% = $228,000, less $120,000 of spend = +$108,000. It is the only proposal with a positive, measurable year-one return, and the $120,000 is a variable commitment rather than a permanent rebate structure.
Why the reasoning, not just the number, matters. A and B both fail because they reduce the contribution rate on sales that already exist. C adds volume at the existing rate on a channel the chain can turn off. The forecast should still be treated skeptically, since it is a vendor-style projection; ask for the assumptions on cost per lead, conversion rate, and the share of attributed sales that would have happened anyway.
Conditions before approval:
- Pilot in two of the six stores for eight weeks with a holdout comparison store, and define a test metric - incremental contribution, not clicks or impressions.
- Cap total spend at $120,000 and require the agency to report cost per incremental dollar of margin.
- Track redemption and attribution so that online-influenced in-store sales are not double-counted.
What would reverse the decision: if the pilot shows attributed sales are mostly existing customers (a cannibalization rate above roughly 50 percent), the true incremental contribution could fall below $120,000 and C loses its case. At that point the right answer is to spend nothing and investigate why traffic is flat - assortment, location, or price image - rather than buy a promotion.