The Most Common Business Trajectory I Deal With

Here's a classic situation. Look at the five year projected trajectory for this brand.

In a post lockdown world, new customers stabilized and the business is projected to slowly degrade. With an ad-to-sales ratio of 25%, this company really cannot afford to spend more on marketing to grow.

Why do I say that?

Let's pretend that the business cuts back on their marketing spend by 20% for just one year. Here is how the trajectory changes.

You cut back for one year ... just one year ... and the top-line crumbles and it does not quite return to prior levels even when you restore ad spend to prior levels.

Here are top-line sales for five years plus the year just completed.

• Base Case (Millions):  $80.2, $78.0, $76.6, $75.6, $74.9, $74.3.
• Reduced Ad Spend:    $80.2, $71.2, $74.0, $73.5, $73.6, $73.4.

Now let's look at profit:

• Base Case (Millions):  $12.1, $11.7, $11.5, $11.3, $11.2, $11.2.
• Reduced Ad Spend:    $12.1, $13.4, $11.1, $11.0, $11.0, $11.0.

You generate an additional $1.7 million profit by cutting back on ad spend for one year ... but ... BUT ... you lose file momentum, causing you to $1.1 million of profit in the next four years.

This is the situation I run into all the time. The business is stuck. Completely stuck. If it wants to be more profitable it can be more profitable ... for a period of time ... then profit erodes because you lose file power. However, to generate additional profit you hurt top-line sales, and you hurt top-line sales for subsequent years even if you restore ad-spend to prior levels.

This is what happens when you depend upon marketing to generate orders. Eventually you trap yourself. You can't spend more because it is unprofitable. You can't spend less because the business suffers. You're stuck.

Overspending

If you spend more on marketing, you'll likely lose profit in the short-term but you'll increase the top-line both short-term and long-term.

Sometimes, however, your company grossly overspends on marketing. This creates a different set of dynamics. Let's say that I cut back my offline marketing spend by 60% ... a whopping 60%!!

Oh oh.

By year five, you take a business that generated $8,751,000 in sales and $1,908,000 in variable profit ... and you turn it into a business that generates $6,994,000 in sales and $2,039,000 in variable profit.

Over five years, you generate $1,106,000 more in total variable profit by cutting way back on offline marketing spend.

But your business becomes significantly smaller.

These are the traps you face, leading your business.

Run the scenarios.

Know where your business is headed.

Incremental Gain

So you'll spend $300,000 next year on digital marketing, and you want to see what would happen if you spent $400,000 next year ... you run your simulation.

You generate $199,000 in sales in the first year, then you experience diminishing returns as most of those customers do no repurchase thereafter.

You lost $40,000 spending additional money on digital marketing - after that, you generate more profit per year for four years. In total, however, your decision cost you $6,000 profit after five years.

If you extend the payback window beyond year five? Yeah, you're going to come out ahead.

I'm getting a lot of messages from you ... "it is now too expensive to acquire customers, we have to cut back".

If you cut back your marketing spend, you'll likely be more profitable in the short-term. Long-term? Run the simulation and find out. Regardless, we need to introduce this short-term / long-term tradeoff analysis to the work we perform, correct?

It's Time ... Again!

It is time for yet another run of The MineThatData Elite Program. Yeah! Four months pass quickly these days, don't they?

For just $1,800 (first-time participants, $1,000 for returning professionals) you'll get a high-level summary of your file health ... and in this run, we'll provide some focus on whether low-price customers are willing to pay higher prices during this inflationary period.

All practically for free!

Send me an email (kevinh@minethatdata.com) and we'll get started.

• Data due by February 15, 2022.
• Five Years of Data Through 1/31/2022.
• Payment due by 2/15/2022.
• Writeup delivered by 2/28/2022.

Opens, Clicks, Conversions. Wait, What?

When people talk about email marketing, you get an "industry" view of the craft. A style of language has been crafted so that professionals are speaking via common terms that everybody can understand.

This means you measure results via opens/clicks/conversions.

What would happen if you stopped your email marketing program altogether?

What would happen if you didn't execute your email marketing program for five years?

Well, when you have a simulation tool, you can answer that question.

Here is our base case for the brand we studied this week.

Aaaaand .... here's what the five year forecast looks like if we stopped email marketing altogether.

Holy cow!

Here's what sales look like by year with email marketing (000s).

• $9,524 today.
• $9,236 after 1 year.
• $9,053 after 2 years.
• $8,915 after 3 years.
• $8,820 after 4 years.
• $8,751 after 5 years.

Here's what sales look like without email marketing. Tell me what you observe.

• $9,524 today.
• $7,566 after 1 year.
• $7,028 after 2 years.
• $6,643 after 3 years.
• $6,417 after 4 years.
• $6,253 after 5 years.

Yes, the impact compounds. When you remove an email order, you remove future orders in other marketing channels. You weaken the customer, and consequently you weaken file power, hurting future sales.

Let's look at profit by year. With email marketing.

• $2,065 today.
• $2,007 after 1 year.
• $1,969 after 2 years.
• $1,941 after 3 years.
• $1,922 after 4 years.
• $1,908 after 5 years.

What happens if we remove email marketing?

• $2,065 today.
• $1,487 after 1 year.
• $1,398 after 2 years.
• $1,338 after 3 years.
• $1,302 after 4 years.
• $1,275 after 5 years.

Oh my goodness.

By the time five years have passed without email marketing, variable profit is down 34%. After you subtract fixed costs (about a million a year), you barely have any profit left!

What happened to rebuy rates? After five years:

• With Email Marketing = 29.4%.
• Without Email Marketing = 21.3%.

So yeah, email marketing is kinda important, don't you think?

When somebody at your company sleeps through your 2022 email marketing program, WAKE 'EM UP! Show them the results of your simulation applications, and show them that without you your company is gonna struggle. Ask them to pay attention! You matter.

Here's What Happens When Marketing Dollars Are Eliminated

Remember the stuck, tepid business we were studying?

In this scenario, I simulate what happens if we remove all offline marketing tactics.

There goes the top-line. Profit briefly improves, then, weeeeeee profit erodes quickly.

Marketing is important. If somebody doesn't think marketing is important, shut marketing down for a bit and see what happens.

Marketing's Impact on a Business

Let's dig into my advertising simulation spreadsheet. This business, like so many, is stuck.

Over the next five years this business will trend down from $9.5 million to $8.8 million. Variable profit (profit prior to subtracting fixed costs) goes from $2.1 million to $1.9 million.

No bueno.

This company advertises via print, email, and assorted digital channels.

Let's say that somebody wants to double the digital marketing budget for a year. 

Let's compare sales by year. Here's the base case:

• $9.5 million today.
• $9.2 million after year one.
• $9.1 million after year two.
• $8.9 million after year three.
• $8.8 million after year four.
• $8.8 million after year five.

And after doubling digital marketing dollars in year one:

• $9.5 million today.
• $9.8 million after year one.
• $9.2 million after year two.
• $9.0 million after year three.
• $8.9 million after year four.
• $8.8 million after year five.

Here's the base case for profit.

• $2.1 million today.
• $2.0 million after year one.
• $2.0 million after year two.
• $1.9 million after year three.
• $1.9 million after year four.
• $1.9 million after year five.

And after doubling digital marketing dollars in year one:

• $2.1 million today.
• $1.9 million after year one.
• $2.0 million after year two.
• $2.0 million after year three.
• $1.9 million after year four.
• $1.9 million after year five.

As you can see, not a lot changes. This business isn't being saved by marketing, if marketing tactics continue to be employed the same way - with just more expenditures.

Now let's see what happens if we double our digital marketing budget for each of the next five years.

After five years this business is marginally bigger ($9.7 million) and profit is lower ($1.85 million).

This business doesn't respond well to digital marketing tactics (this is frequently the case when you have a customer base age 65+).

Tomorrow I'll show you what happens if you stop offline marketing efforts with this business.