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.