July 27, 2016

It's Fun To Acquire A Customer Via Discounts And Free Shipping!

It sure it!

But is it the right thing for your business? How does LTV vary between a customer earned the honest way (full price, no promotions) and a customer earned via cheating (discounts, promotions, free shipping)?

There are times when the customer earned via cheating is worth more, long-term.

There are times when the customer earned the honest way is worth more, long-term.

Your job is to do the math. No more theoretical arguments.

Let's run through a brief example. I typically create twelve-month profit value models for folks. The models might reveal the following:

Customer Earned The Honest Way.
  • Probability of Purchasing, Next 12 Months = 40%.
  • Amount of Net Sales Generated if Customer Purchases = $200.00.
  • Gross Margin Percentage = 60%.
  • 12 Month Ad Cost = $20.00.
  • Pick/Pack/Ship Expense, as a % of Sales = 5%.
  • 12 Month Profit = 0.40*$200.00*(0.60 - 0.05) - $20.00 = $24.00.
Customer Earned Via Cheating.
  • Probability of Purchasing, Next 12 Months = 45% (better).
  • Amount of Net Sales Generated if Customer Purchases = $215.00 (better).
  • Gross Margin Percentage = 53% (worse due to discounts/promos).
  • 12 Month Ad Cost = $20.00.
  • Pick/Pack/Ship Expense, as a % of Sales = 10% (worse due to free shipping promos).
  • 12 Month Profit = 0.45*$215.00*(0.53 - 0.10) - $20.00 = $21.60.
Well isn't that fun?!
  • The discount/promo buyer is more loyal.
  • The discount/promo buyer spends more.
  • The discount/promo buyer generates less profit.
Now, as long as the brand is able to acquire 12% more customers via discounts/promos, then the math works out well ... you'll generate 11% less future profit per customer but you'll generate 12% more customers yielding more profit.

It is entirely possible that the discounts & promotions & free shipping are the right thing to do for your business.

But you have to do the math to know, don't you?

Are you running the math? Or are you being a "strategic marketer"?

Please ... run LTV math. I'm beggin' ya!