December 26, 2010

Dear Catalog CEOs: Prices Influence Future Behavior

Dear Catalog CEOs:

We've talked a lot about merchandise in the past month, and for good reason ... so few people talk about it!

Here's a problem we all face.  We want customers to buy from us, so we offer free shipping or 20% off, and we marvel at the 15% or 20% increase in demand we generate from the promotion.

What we don't see is the impact this has on the average price per item purchased.


Say a customer buys three $40 items after you offer the customer 20% off on orders > $100.

Instead of a $40-per-item customer, you transform the customer to a $32-per-item customer.


Look at the table at the start of this post ... I took price points, and categorized them from cheap to high-end, within a client.  Then, I looked at the price points that customers buy from in the future, cheap to high-end.


It doesn't take a rocket scientist to tell you that if a customer buys cheap items in the past, the customer will buy cheap items in the future, and vice versa.  This trend holds for customers who have only one historical item in their purchase history ... the trend holds for customers who purchased twenty-five items in their purchase history.


When we measure everything in terms of campaigns or response to catalogs, we miss the subtleties associated with longer-term customer behavior.  We make decisions that appear good today, then we can't understand why we can't sell higher-priced, high-margin items in the future!

3 comments:

  1. This is a great point, Kevin. I'm going to riff a bit on it over on RKGBlog -- citing you, of course.

    Two questions for you:

    1. Am I write that of the big three, R, F and M, R is the most predictive and M the least though still significant?

    2. Any rules of thumb on customer value as a function of first purchase price. If A's first purchase is twice as valuable as B's can we say that A is sqrt 2 times as valuable as B, or some other mathematical rule of thumb?

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  2. I was wrong to write "write" when I meant "right" :-)

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  3. 1 - For the average e-commerce business, yes, this holds. There are businesses that sell big-ticket and small-ticket items where M becomes more important, but overall, yes.

    2 - There's a scale here ... it isn't always a 1-to-1 relationship where an order that is 2x as big yields 2x future value, but yes, there is some sort of scale where a 2x order yields an increase.

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