March 30, 2017

File Power and Ad Cost

Here's a fun one from the world of Retail.

I worked with a company that loved trying to convert online buyers to in-store buyers. Retail catalog after retail catalog after retail catalog - until that customer bought in a store. Then what? Way more retail catalogs!

Here was the scenario they created.

3x Online-Only Buyer.
  • Rebuy Rate = 50%.
  • Spend per Repurchaser = $280.
  • Gross Margin = 50%.
  • Operational Expense = 10%.
  • Next Year's Ad Cost = $12.
  • Next Year's Profit (File Power) = 0.50 * 280 * (0.50 - 0.10) - 12 = $44.00.
2x Online Buyer, 1x Retail Buyer.
  • Rebuy Rate = 53%.
  • Spend per Repurchaser = $285.
  • Gross Margin = 50%.
  • Operational Expense = 10%.
  • Next Year's Ad Cost = $18.
  • Next Year's Profit (File Power) = 0.53 * 285 * (0.50 - 0.10) - 18 = $42.42.
Among the customers who converted to stores, spending increased (0.53*285 vs. 0.50*280 = +8%). That's the kind of number that the omnichannel experts love to hear!

But profitability declined by 4%. The Power of the Crossover File (#multichannel #omnichannel) was/is worse.

I know, I know, folks should #optimize ad spend for this customer ... well good. But how do you know you should optimize ad spend for this customer unless you compute File Power?