Sometimes companies join forces with a charity or a cause as part of a promotional effort. In the process, the company gains positive publicity and the charity receives a financial boost. To signal this joint relationship, companies usually post, “all proceeds go to” on the product and on related advertising material. However, this phrase has several interpretations with respect to the amount of the financial contribution to the charity.
Proceeds are the amount of money remaining once the costs of production are deducted. Essentially, proceeds are the item’s net profit. For instance, a clothing company decides to advertise on its line of T-shirts that “all proceeds go to the John Doe Foundation.” If a T-shirt costs $2 to produce and a store sells it for $10, then $8 of the T-shirt’s sales will go to the foundation.
Sometimes, businesses do not give all proceeds for donation but instead give a percentage of the item’s sale to a cause. Whether or not this tactic contributes more to charity than donating all of the proceeds depends on the item’s profit margin. If a company agrees to give 10 percent of its large soda sales to charity and each cup is sold for $3, then the company donates 30 cents per cup. On the other hand, donating all of the proceeds will yield a higher donation because soda has a wide profit margin. If the cup costs the company 15 cents to produce, then the donation per cup is $2.85.
Donating money based on a product’s proceeds hedges the company’s risk because its costs are covered. A business incurs risk when sponsoring an event because the sales from the tickets might not cover all of the expenses, let alone leave enough to give profits of the event to charity. A way to avoid this scenario is to have items for the event donated, such as food and venue space.
A company cannot stay in business if it donates all of a day's profits to charity. However, companies engage in this type of behavior as a form of marketing. Many consumers, given the choice between two similar products that they have not tried yet will purchase the item that provides an additional social benefit. Such corporate social responsibility may engender a sense of consumer loyalty. Robert Passikoff, author of “Predicting Market Success,” explains that the direct link between consumer loyalty and socially responsible acts such as donating money is difficult to measure. In one survey, sponsoring a literacy program yields a 2 percent boost in consumer loyalty whereas sponsoring a baseball team results in a 10 percent increase. Thus, a company must carefully determine which of its donation sponsorship programs will yield the greatest return.