The short answer is: “Make sure you know who has done the simple maths!”
Using Hoover’s free flights offer as an example, let’s remind ourselves of the initial promotional offer:
- spend £100 on a vacuum cleaner or washing machine and get a voucher for 2 free flights to Europe
- offer limited to one per UK household
So the offer was essentially spend £100 and get flights worth £300. That should have set alarm bells ringing immediately…
In 1992 you could get a flight to most destinations in Europe for about £180–£200 (yes, competition in the airline industry has almost eradicated 20 years of price inflation). Let’s say on average a European flight was £150. So the offer was essentially spend £100 and get flights worth £300. That should have set alarm bells ringing immediately as it is quite unusual for a company to offer something for free which has an equal or higher value than the item being sold, unless it is more of the same product (think BOGOF, BOGTF).
At this point you might have thought that the Marketing team at Hoover would’ve been having second thoughts. Hoover was effectively offering consumers £300 in exchange for a £119 product.
At this point you might have thought that the Marketing team at Hoover would’ve been having second thoughts. Hoover was effectively offering consumers £300 in exchange for a £119 product (the cheapest vacuum cleaner in its range at the time). If we assume that the gross profit on the product was 50% or £50 (after removing VAT from the selling price), the actual loss on each item sold was £250 if the promotional offer was taken up. The more sold, the greater the loss generated.
So how many deals could be sold? In 1991 there were 22 million households in the UK (according to the Office for National Statistics (ONS)). So if every household in the UK had bought a vacuum cleaner and claimed the free flights, Hoover would’ve lost £22,000,000 x £250 = £5.5 bn! That was its maximum possible exposure. If someone had performed that very simple calculation, do you think they would have continued with it? Maybe if they thought the redemption rate was going to be very low but, even so, there was a significant cost attached to getting the redemption rate even marginally wrong.
If every household in the UK had bought a vacuum cleaner and claimed the free flights, Hoover would’ve lost £5.5bn!
Even at a 1% redemption rate (i.e. 1% of all UK households responding to the offer), which most of you reading this would accept is a “low” redemption level, that would have meant a cost of £55m! Actually that figure is only a little higher than the £48m Hoover admitted it cost the company.
So for every 0.1% that the redemption rate was forecast inaccurately, it was going to cost the business £5.5m. In 1991, the UK was in recession and when personal finances are stretched, offers like this one are going to be very attractive: for a family it could be the difference between having a summer holiday somewhere warm and not having a holiday at all. The chances were therefore that the promotion was going to be attractive to consumers.
Hoover was effectively playing high stakes poker and it would’ve been too much of a gamble for me personally. But then we have just gone through a process to assess the financial risk and perform a basic sensitivity analysis. We have data on which to base a decision. As a brand, if you have also thought about and written down your corporate attitude to promotional risk (i.e. have a promotional risk management policy or promotional risk management guidelines in place), it makes the decision about proceeding or not pretty straightforward. Hoover clearly never did that and paid the ultimate price —the destruction of the company and long-term damage to its brand.
So in order to “make sure you know who has done the simple maths”, have robust processes and checks in place when assessing promotional risk, carried out by appropriately trained professionals (a qualified accountant in your own business is a good place to start), so that the same thing cannot happen to your brand.