November 15, 2015

Homework Results

Here is the spreadsheet I asked you to download (click here).

This was our base case.



And this is the optimal solution, given our assumptions.


#OhBoy.

This is a very different answer, isn't it? What did we learn?

  • We are expected to generate $112 million in Year 10 as-is. Optimal profitability yields $85 million demand. There won't be a CEO who wants to hear that.
  • The 12-month buyer file decreases from 495,000 to 399,000. No catalog or e-commerce marketing executive wants to hear that.
  • The annual marketing budget drops from $28.6 million to $10.3 million. In other words, there is so much marketing waste happening that it is almost appalling.
  • Profit increases from $16.3 million to $23.8 million ... nearly a 50% increase.
The goal, here, is to measure what "optimal" looks like, and compare it to where we are.

I can promise you that your Executive Team will throw you out of the room when you share this with them. Don't hit your head on the tile flooring when they throw you out, you don't want to get concussed along the way.

But it is your job, yes, your job, to know what optimal looks like, and to compare optimal to where you are. And it is your job, yes, your job, to teach your company what you are doing that causes you to not optimize profit.

I see examples like this all the time ... company after company after company trying desperately to grow sales, investing a fortune to prop up the top line. Heck, in year one alone, ten million dollars in marketing expense are saved, comparing optimal to actual. You could start a whole new e-commerce only business unit with the ten million dollars, and build a business that protects your future while harvesting profit out of the existing catalog business model.

What questions do you have? Send me an email (kevinh@minethatdata.com).

Are you able to run a simple simulation like this for your business? If the answer is "no", tell me what stops you from running a simple simulation like this.