"Buy 1 and Get second one for 50% less" or "Buy 2 and Get 1 free"?

What is the deal?

This is a plan to entice customers to buy 2 of a product, when all they really needed were 1. But what about the company's profit margin?

Suppose shampoos sell for $2.00 but cost $0.80, with $1.20 profit for the company. You can buy one shampoo, giving the company $1.20. Or, you can buy 2 shampoos, and get one free. That cost the company 3 x $0.80, = $2.40. But you paid $4.00, so the company makes $1.60 in total profit. That's more than the first case.

Yes, in the 2nd case, the company is only making $1.60/3 = $0.53 per shampoo. In the first case, they make $1.20 per shampoo. But in terms of total profit, the 2-for-1 deal is better. If I give you the chance to get 100% profit on a dollar, or 10% profit on a100 dollar, what do you choose? Definitely on 10% profit on a 100 dollar because you make $10 as opposed to only $1 on 100% profit on a dollar. Total profit ends up at the bottom line.

This is similar to buying in bulk. When you buy in bulk, the company gets less profit per item. But, the total profit is certainly higher. In addition, there is a certain fixed cost to create a unit. The marginal costs of additional products may be minimal, so the company can afford the low profit per unit, because the cost-per-unit is small as well.

They say that when you buy bottled water, you are really paying for the plastic (since the water costs only a few cents). Thus, the cost of the extra water in a large bottle really isn't important.