November 10, 2015

Spend Some Money On Those Loyal Buyers!! Or Not?

Here's our example:


In our 0-12 month "A" buyer segment ... the best 20% of the twelve-month buyer file, we are spending $40 marketing dollars per year ... between catalogs and email and affiliates and paid search and social and whatever else, we're pumping a lot of marketing dollars into this segment.

Also notice the next column. This is the "organic percentage". It's the percentage of demand the segment will spend if marketing is altogether discontinued. Needless to say, this is the most important metric in the whole darn simulation.

A show of hands ... how many of you know your organic percentage by segment, or overall? The smartest companies know it at an overall level. Genius-level companies know it by segment. Where do you stand?

Among our "A" customers, this company knows that 75% of the demand is organic ... it's going to happen because customers love the brand. The remaining 25% is caused by marketing activities. Therefore, if we want to see what happens if we bump up marketing spend, we have to measure the impact only on the 25% of demand that is impacted by marketing, right? Right??!!

So let's try something. Let's increase marketing spend by 25% within just this segment, for each of the next ten years. How does demand and profit/loss change, as a consequence?

For the next five years, here's the baseline demand/profit scenario for the company.
  • Year 0 = $88.3 million demand, $15.1 million profit.
  • Year 1 = $92.3 / $15.4.
  • Year 2 = $95.7 / $15.7.
  • Year 3 = $98.6 / $16.0.
  • Year 4 = $101.1 / $16.1.
  • Year 5 = $103.3 / $16.2.
Now, I change cell D6 in my spreadsheet (next week, I will provide a link to the spreadsheet so that you can play with it on your own), from 1.00 to 1.25, to simulate a 25% increase in marketing spend. Here's what I get.



For the next five years, here's the changed demand/profit scenario for the company.
  • Year 0 = $88.3 million demand, $15.1 million profit.
  • Year 1 = $93.2 / $15.0.
  • Year 2 = $97.0 / $15.3.
  • Year 3 = $100.2 / $15.6.
  • Year 4 = $103.0 / $15.8.
  • Year 5 = $105.3 / $15.9.
Demand grew, but we generated less profit.

#OhOh.

In Year 1, we generate $900,000 more demand, but we lose $400,000 profit. That's a bad equation, isn't it?

In Year 5, we are $1.9 million bigger, but are losing $300,000 profit compared to the base line problem.

For this company, for this segment, a 25% increase in marketing spend is not a good idea. Demand increases. Profit sinks.

What is the appropriate investment level for this segment?

We'll find out tomorrow!