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Lost Sales aren’t Always Lost (What are Make-up Sales?)

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When a business suffers a loss it will often lose the ability to sell products or services to its customers. These lost sales, however, are not always permanent and at times the insured can “make-up” the losses after the business resumes operating. Without giving consideration to this fact claim costs may increase, and the insured may be over-indemnified.

But, how do you know when a sale is truly lost and how do you determine what may be made up later?

Questions in assessing “make-up” sales

Assessing if sales completed after an insured resumes operations following a loss incident include any component which makes up for sales lost while closed, can be extremely difficult.  To assist, there are a few things you will need to establish:

1. What was the performance of the business immediately upon resuming operations?

When a business reopens it is not uncommon to see a spike in sales for a short period immediately after reopening. The portion of the sales spike in excess of normal projected sales is often what represents the make-up sales.

The period of the sales spike can vary from a few days to a few weeks depending on many factors.  However, if a sales spike following resumption of operations last more than a few weeks, you may need to re-evaluate your sales projection methodology (See related blog posts on Sales Projection Methodologies)

In evaluating the performance of the business following the resumption of operations you should apply the same methodology which was used to project lost sales during the period in which the business could not operate.

2. Is it reasonable the business could have make-up sales?

Make-up sales are not possible for all types of businesses. Factors can include the types of product sold or service offered, seasonality, and the level of local competition.

Products which are unique to the insured’s business, expensive, or non-essential are more likely to be made-up following the resumption of a business’ operations.  Examples may include furniture stores, high-end clothing stores, custom products, and jewellery stores.  As the products which customers purchase from these types of business are typically planned in advance, decided based on customers specific tastes, and customers are often willing to wait to purchase the specific product they want, these types of business’ are likely to experience make-up sales in the event of a loss.

Sales of goods which are perishable or purchased more impulsively are less likely to experience make-up sales.  If a customer chooses to go to a restaurant on a Saturday night and that restaurant is closed due to a loss, it is more likely that customer will simply find another restaurant rather than waiting for the business to reopen before purchasing their meal.

The level of competition in the area the business operates will also directly impact the likelihood of make-up sales occurring.  A furniture store in a large urban area with a large amount of competition selling the same brands may have no opportunity for make-up sales.  On the other hand a grocery store in a remote area with little competition may experience make-up sales as customers delay purchases due to lack of alternative options.

Final Thoughts

Consideration of make-up sales when determining a business interruption loss will require the review of additional records beyond the time a business resumes operating. This will extend the length of time required to complete the claims process.  However, failing to consider this possibility may also increase claim costs as the insured’s business will be over indemnified for their losses.

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