May 13, 2007

Return On Investment When Business Is Good

If you're one of the lucky folks managing online or catalog marketing at a company that is "winning", you have an interesting opportunity.

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?