May 07, 2014

The Leaking Profit Bucket

In 1994, there was variable profit, and variable profit was good.
  • The customer spent $100.
  • The item cost $40.
  • The customer spent $15 to ship the item.
  • It cost $10 to ship an item.
  • The company spent $20 in marketing cost (catalogs) to generate the purchase.
  • The company generated $50 variable profit.
In 2004, there still was variable profit, but there was less of it.
  • The customer spent $100.
  • The item cost $40.
  • The customer spent $15 to ship the item half the time, got free shipping the other half of the time, generating $7.50 of income for the company.
  • It cost $10 to ship an item.
  • The company spent $20 in marketing cost (catalogs) to generate the purchase.
  • The company spent $3 on paid search to generate the purchase.
  • The company generated $34.50 variable profit.
In 2014, things are certainly spinning out of control.
  • The customer spent $100.
  • The item cost $40.
  • The customer spent $0 to ship the item due to a free shipping promotion.
  • It cost $10 to ship an item.
  • The company spent $15 in marketing cost (catalogs) to generate the purchase.
  • The company gave up $20 due to a 20% off promotion.
  • The company spent $3 on paid search to generate the purchase.
  • The company spent $1 to pay affiliates to send the order back to the website.
  • The company spent $1 on email marketing to send six blasts a week.
  • The company spent $1 on retargeting fees to facilitate the order.
  • The company spent $1 with Facebook to create awareness among "fans".
  • The company generated $8 variable profit.
Yes, of course, this is an exaggeration. It's designed to get you to think. 

Please think about what you're doing. We're in a world where there appear to be three options.

  1. Proprietary Merchandise that yields a premium price and healthy gross margins.
  2. A race to the bottom, where, as always, there can only be a handful of winners.
  3. Pricing games that allow a "brand" to only give away the farm to smart customers, generating all profit from uninformed customers.
Which option represents your business?