September 10, 2007

E-Mail Marketing Quiz: Full-Price Campaigns, Or Promotional Campaigns?

You are the e-mail Executive at a multichannel brand.

You run a series of tests, measuring how promotions work against an e-mail merchandising strategy offering customers compelling merchandise at full price.

At the end of your series of tests, here is what you learned:

No Promotions:
  • % Of Delivered E-Mails With Clicks = 3%.
  • % Of Clicks Converting To A Purchase = 2%.
  • Purchasers Per 100,000 E-Mails Delivered = 60.
  • Average Order Size = $100.
  • Demand Per E-Mail = 0.03 * 0.02 * 100 = $0.06.
  • Profit Per E-Mail = $0.018.
With Promotions (like 20% off your order of $100 or more):
  • % Of Delivered E-Mails With Clicks = 5%.
  • % Of Clicks Converting To A Purchase = 3.5%.
  • Purchasers Per 100,000 E-Mails Delivered = 175.
  • Average Order Size = $110.
  • Demand Per E-Mail = 0.05 * 0.035 * 110 = $0.1925.
  • Profit Per E-Mail = $0.026.
Clearly, customers respond to promotions.

Your Chief Merchant and Chief Marketing Officer do not want to make your business "promotional" in nature.

Promotions hurt the gross margin. Your Chief Merchant receives a healthy bonus if gross margin percentage is very high.

Your Chief Marketing Officer hates promotions, because she has been charged with growing a full-price brand.

Fortunately, the decision is yours. You are accountable for the e-mail marketing program, and you receive a healthy bonus if you grow e-mail demand, year-over-year.

Do you go with a low-response, full-price strategy? Or do you go with a promotional strategy that makes you look good, but fails to build partnerships with other executives? Do you "split the difference"?

12 comments:

  1. Anonymous12:52 AM

    This comment has been removed by a blog administrator.

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  2. Kevin,

    I think this point so clearly illustrates so much of what is wrong with etailing today and the silo approach to business. It's all CYA (cover your a&%). I am amazed when merchants tell me they can't work on their X problem (improve checkout, category page, etc) because the team is too busy getting up the latest promotions. ARRRRRRHHHHHHHH. Sorry I just needed to let that out. Thanks.

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  3. What Bryan said.... ;-)

    Sheeesh, these are the same companies that "manage by the numbers. These are the things that make me want to stick a knitting needle through my ear.

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  4. So gentlemen, would you go with promotional e-mails, or would you compromise response to help your co-workers achieve their objectives?

    There's no doubt that the way we organize has an impact on how the customer behaves.

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  5. Kevin,

    Can you explain your demand equation? and how did you get your profit per email to be $0.018 and $0.026? Is that just (total revenue) - (total cost to send the email) divided by emails sent?

    As for your question, even if your goal as an email marketer is to grow email demand year-over-year, I would have to think that whatever you do has to be inline with the overall marketing strategy. If your overall strategy is to brand yourself as a full-price brand, you stay away from discounts in your email. If your goal is just to grow your sales and customer base, discounts would be fine. If its a mix of those, then mix up your emails with discounts and other content.

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  6. Demand = (Clicks / E-Mails Delivered) * (Conversion Rate) * (Average Order Size).

    For profit, I used a profit factor of, I think, 35% for full price merchandise, and 20% for sale merchandise.

    Profit Factor = (Gross Margin % - Variable Operating Expense %).

    To complete the profit calculation, I subtracted the cost of each e-mail, which was estimated at $0.003 each.

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  7. Anonymous9:41 PM

    I don't understand why the only choice is price promotion or not. There are hundreds of promo ideas beyond price that can protect your overpaid executives margins and still generate great response.

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  8. Anonymous, can you share any of the hundreds of promotional opportunities you mentioned?

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  9. Hi Kevin,

    Personally, I'd be concerned about the long-term effects of frequently offering discounts/promotions. With a strategy of frequently offering promotions, subscribers may eventually begin to "expect" a certain minimum discount/promotion, and begin to treat that as the "regular" price. So over time, their response either drops, or your margins do because you have to offer them larger discounts/promotions.

    We recently had a discussion of promotions/urgency tactics on our blog and the consensus seemed to be that excessive use of promotions leads to a loss of credibility for the marketer, which can negatively impact your repeat business.

    If you're consistently bringing in new subscribers whose expectations haven't yet been set - enough that you can keep up the numbers you cite for the "with promotions" strategy - then go for it. But for the reasons above, I'd be worried about the per-email profit shrinking in the long run if you went full steam ahead on the "with promotions" strategy.

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  10. Kevin,

    I guess my question is how does that formula calculate demand? What is the thinking behind the formula?

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  11. There are two ways to calculate demand in most cases, the easy way, and the way I chose to calculate it.

    The easy way is to take what you sell, and divide it by the number of e-mails you send. For instance, if you sold $100,000 of merchandise, and you sent 500,000 e-mails, demand per e-mail is (100,000) / (500,000) = $0.20.

    Demand per e-mail can also be calculated via the geeky formula I used.

    Demand per E-Mail = (% Of Clicks) * (Conversions Per Click) * (Amount Spent per Conversion).

    If you send 100,000 e-mails, and 5% of the people click through the e-mail to the website, and 4% of the clicks convert to a purchase, and each purchaser spends $100, you have ...

    ... = (0.05) * (0.04) * (100)

    ... = (.002) * 100

    ... = $0.20.

    Notice that I get the same answer as when I take total demand and divide it by the number of e-mails delivered.

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  12. Justin, good points, thanks for contributing, and for pointing us to your blog!

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