October 03, 2010

Discount / Promotion Algebra You Need To Know

Many folks contacted me last week with information about Groupon and their presentation at Shop.org.

By the way, wouldn't it have been nice if Shop.org partnered with Groupon and offered you, the loyal marketing executive, a sweet 50% discount off of the Shop.org conference registration fee? ... and did I see that Brett Michaels has a keynote at the DMA conference ... wow ... maybe the DMA will partner with Groupon and give you a sweet 50% discount so that you can hear that one on the cheap).

Well, I wasn't in attendance, so I cannot vouch for this fact ... but I'm told that it was said that losses on Groupon transactions are "made up for" on the next purchase.

This "truthiness marketing math" concept can work. Let's work through an example:
  • You lose $3 profit on your Groupon transaction.
  • You make $10 profit on the next purchase a discount-oriented customer places.
We can use this really neat tool, called "algebra", to figure out the percentage of customers who need to purchase again so that you make money.
  • -$3*(1-x) + $10*(x) > 0.
  • -$3 + $3*x + $10*x > 0.
  • $13*x > $3.
  • x > (3/13).
  • x > 23.3%.
  • NOTE: The first posting had a rate of 42.9%, which was corrected by multiple readers.
So, the Groupon customer repurchase rate must be greater than 23.3% in order for truthiness marketing math to work.

Here's the problem, dear retail and e-commerce marketing experts:
  • It can be a challenge for a retailer or an e-commerce business to get 23.3% of first-time buyers or discount buyer to repurchase.
Do the math yourself, folks. You know the amount of twelve-month profit a new discount-oriented customer delivers to your business ... right ... you do know this number ... right? So assuming you know this number, calculate the repurchase rate you need ... you do track repurchase rate of first time discount-oriented buyers ... right ... you do know this number ... right? Just do the math, and determine for yourself if this type of promotion is appropriate for your business.

If it is appropriate for your business, good for you!

But if it is not appropriate for your business, then question why the marketing punditocracy are shoving this business model down your throats lately ... stand up for yourselves and make sure that the marketing punditocracy share profitable ideas and tips!