December 22, 2008

Our Promotional Future

Sometimes we do things that cause customers to change behavior. In 2009, we might wonder why our customers don't seem to want to pay full-price for merchandise.

Here's what happens. Based on considerable customer analysis, we have a customer who like to buy full-price merchandise. Here's what this customer is expected to do, next year:

Normal Scenario Full-Price Discounts Grand Totals
Demand $50.00 $10.00 $60.00
Net Sales $40.00 $8.00 $48.00
Gross Margin $20.00 $4.00 $24.00
Less Mkt. Exp. $7.00 $2.50 $9.50
Less Pick/Pack/Ship $4.60 $0.92 $5.52
Variable Profit $8.40 $0.58 $8.98
Profit % of Net Sales 21.0% 7.3% 18.7%

Notice that this customer has a reasonable chance of taking advantage of one of our many discount schemes (lower prices, free shipping, %-off offers). If the customer takes advantage of an offer of this nature, here's what next year's activity looks like:

Transition To Discounts Full-Price Discounts Grand Totals
Demand $25.00 $45.00 $70.00
Net Sales $20.00 $36.00 $56.00
Gross Margin $10.00 $18.00 $28.00
Less Mkt. Exp. $5.00 $11.25 $16.25
Less Pick/Pack/Ship $2.30 $4.14 $6.44
Variable Profit $2.70 $2.61 $5.31
Profit % of Net Sales 13.5% 7.3% 9.5%

The customer is fundamentally different now. She actually spends more, $70 per year instead of $60 per year, but she's going to shop when you tickle her buying bone. And it costs money to tickle the buying bone of a loyal customer.

This style of analysis is essential in 2009. We need to see whether our thirst for clearning merchandise and "maintaining market share" in Fall 2008 have a detrimental impact on customer profitability in 2009.

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