Let's say that this profit and loss statement represented what you expected to happen in April.
| Demand | $100,000 |
| Net Sales | $85,000 |
| Gross Margin | $42,500 |
| Less Marketing Cost | $25,000 |
| Less Fulfillment Expense | $10,200 |
| Operating Profit | $7,300 |
| % of Net Sales | 8.6% |
| Ad to Sales Ratio | 29.4% |
| Average Order Size | $85.00 |
| Number of Purchasers | 1,176 |
| Cost Per Purchaser | $21.25 |
| Profit Per Purchaser | $6.21 |
You expected to generate $7,300 profit, and 1,176 new customers.
You execute this marketing plan, and observe these actual results for the month of April:
| Demand | $115,000 |
| Net Sales | $97,750 |
| Gross Margin | $48,875 |
| Less Marketing Cost | $25,000 |
| Less Fulfillment Expense | $11,730 |
| Operating Profit | $12,145 |
| % of Net Sales | 12.4% |
| Ad to Sales Ratio | 25.6% |
| Average Order Size | $85.00 |
| Number of Purchasers | 1,353 |
| Cost Per Purchaser | $18.48 |
| Profit Per Purchaser | $8.98 |
Courtesy of the magic of your merchandising team, customers loved what you offered them, spending 15% more than expected.
Here's the challenge. If you believe that during the month of May you will see similar results, you can pocket a similar level of sales and profit.
Or, you can increase your advertising, and acquire more names, while still generating the same level of profit you promised to your CFO. This example shows what could happen, if you boosted your advertising spend:
| Demand | $143,635 |
| Net Sales | $122,090 |
| Gross Margin | $61,045 |
| Less Marketing Cost | $39,000 |
| Less Fulfillment Expense | $14,651 |
| Operating Profit | $7,394 |
| % of Net Sales | 6.1% |
| Ad to Sales Ratio | 31.9% |
| Average Order Size | $85.00 |
| Number of Purchasers | 1,690 |
| Cost Per Purchaser | $23.08 |
| Profit Per Purchaser | $4.38 |
This is one of those unique mysteries that complicate the lives of those of us who manage profit and loss statements for online or catalog channels.
Choice number one allows us to pocket an additional five thousand dollars of profit.
Choice number two allows us to achieve our budgeted profit, but grows the top-line by an additional $28,000, and adds an additional 337 customers that contribute to future sales and profit.
I've always advocated spending more money when times are good, and spending more money when times are bad (to liquidate merchandise, but not at liquidation prices) --- holding to the marketing budget when business is close to plan.
What would you do? Would you pocket the profit today, or, would you spend more to acquire more customers, customers that deliver future sales and profit? Your thoughts?
I'd have to agree with you--spend more money when times are good. And, if you factor in lifetime value, you're really doing well! Very interesting food for thought. Thanks!
ReplyDeleteThanks for the comment ... I posted your blog under the Friends of MineThatData section. Good luck building an audience!
ReplyDeleteThanks much. We'll also add you to our blog roll. Also, I'm thinking of driving up from Portland and attending the Seattle DM Day. I noticed that you are speaking and will definitely introduce myself if I can make it next week.
ReplyDeleteFrom a pure money management viewpoint, it makes sense to increase your budget when things are going well, and decrease it when they are not.
ReplyDeleteHowever, I would probably not opt to acquire new names to add to the existing campaign, but use the money to try out a new campaign or to do some additional research.
Unless, of course, you tell me that the data says that you are more than 95% sure you can achieve your results!
Ralph Winters