October 15, 2012

Incremental Value

One of the biggest lies perpetrated on gullible marketers is that multiple channels lead to increased sales.

Here's how the logic works.
  1. A channel used to produce $10,000,000 sales.
  2. A new channel is added, producing $2,000,000 in sales.
  3. The existing channel now produces $8,200,000 in sales.
  4. Total sales are now at $10,200,000.
  5. Somebody queries the database, and realizes that customers who purchase from the old channel and the new channel spend six times as much as everybody else.
  6. Somebody then decides that multiple channels lead to huge sales increases.
Incremental sales are sales that happen, above and beyond the norm.  In other words, customers have a baseline spend level.  Your job, as a marketer, is not to take credit for the baseline, but to grow sales above and beyond the baseline.

Here's a quiz for you.  In the example above, what is the incremental value of the new channel?
  1. $2,000,000 in sales.
  2. $200,000 in sales.
Of course, the answer is (2).  The new channel didn't accomplish much.  Customers switched channels, but customers did not spend much more revenue, did they?

Now, I get it ... somebody is going to say that if you don't capitalize on the new channel, you'll lose market share.  But please, be honest.  How many companies didn't set up websites?  I mean, everybody eventually takes advantage of new channels.  So that's not the issue, is it?

The issue is to find strategies that cause customers to spend incrementally more money.

Hint:  It's hard to get a customer to spend incrementally more money.  Really, REALLY hard!  If it were easy, we'd all be doing it, and all of our sales would be increasing 35% per year, every year.