September 05, 2007

Sale!

Please click on the image to enlarge it (and you'll need to enlarge it!).

Who doesn't love a sale?

Customers love a sale.

When executed properly, management loves a sale --- profit could increase, sales likely increase, inventory is moved.

But then the sale ends. And a cohort of customers purchased because they got a "deal". These customers, in many instances, are less likely to repurchase, and if they want to repurchase, they want to get a "deal"!

Couple that with a management team that is forced to grow top line sales. Sure, bloggers, management consultants and marketing experts will tell management to "sell great products", and everything will take care of itself. That's a theoretical argument. Management has to move what sits on the shelves today, regardless whether it is great or not.

So, management adds additional sale periods. Management mixes promotions, free shipping, 20% off your order, 40% off selected merchandise. Sales grow! All is good!

Eventually, the mix of the customer file is irrevocably changed. A large chunk of the customer file loves sale merchandise. Even if you have great full-price merchandise, it will take a few years to acquire the kind of customer who loves full-price merchandise.

The image at the start of this post looks at three scenarios, played out over a five year period of time. The scenario in the upper-left portion of the image is a full-price business. The scenario in the lower-right portion of the image demonstrates how many discount-based customers must be acquired each year, in order to keep gross margin dollars and EBIT growing. The scenario in the lower-left portion of the image shows the profit impact of not acquiring enough sale customers to offset the loss in gross margin.

The business must get twenty-five percent to thirty percent more new customers, each year, in order to offset the loss of gross margin dollars, in order to offset the reduction in annual repurchase rate.

With Multichannel Forensics, a management team can analyze various business scenarios, understanding the long-term consequences of decisions made today. This illustration demonstrates how quickly the customer file is overrun by sale customers. Fundamentally, the business is changed, because it has attracted a different customer demographic, one that loves a deal.