### Dear Catalog CEOs: Full Price

Dear Catalog CEOs:

I just ran a query for one of your peers ... well, not a query, but a model.  I'll simplify the model for you, so that we can all understand the message behind the model.

I analyzed first-time buyers in the past twelve months, modeling the amount of future demand these customers will generate.  There were only two dependent variables.

• Dependent Variable = Demand Spent Next Year (2012).
• Independent Variable = Demand Spent Last Year (2011).
• Independent Variable = 1/0 Indicator ... Did Last Year's Purchase Include A Discount/Promotion Code ... 1 = Yes, 0 = No.
Here's the outcome of the model (again, this is over-simplified to make a point):
• Future Demand = \$28 + \$0.220 * (Demand Spent Last Year) + \$8.00 * (Did Customer Purchase Include A Discount / Promotion Code).
This company mails about 12 catalogs a year to this audience.  This company converts 45% of demand to profit.  This company produces catalogs that cost \$0.50 each.  This company spends an average of \$2 per customer on online marketing.

This company utilizes 20% off promotions.
• 10% of future demand among customers not historically using a discount/promo code are discount focused.
• 20% of future demand among customers who historically used a discount/promo code are discount focused.
We now have enough information to determine the future impact of discounts/promotions on this audience.  Let's assume that each customer spent \$150 last year.
• Full Price Customer Future Demand = \$28 + 0.220*150 = \$61.00.
• Discount Customer Future Demand = \$28 + 0.220*150 + \$8 = \$69.00.
So far, the discount customer is "worth more", in terms of demand ... 13% more.
• Full Price Customer Profit = \$61.00*0.45 - \$61.00*0.10*0.20 - 12*\$0.50 - \$2.50 = \$17.73.
• Discount Customer Profit = \$69.00*0.45 - \$69.00*0.25*0.20 - 12*\$0.50 - \$2.50 = \$19.10.
Oh oh.

On the surface, with all of your KPI-infused dashboards, you're increasing customer value by 13%.  Google Analytics tells you how successful you appear.  Great!  Except you're not successful.  You cut future profitability by 7%.

By the way .... this is a common outcome.  In fact, the outcome often looks worse than this.

Of course, you have to do the math to know this.

And almost nobody does the math.