November 28, 2006

Customer Acquisition: Full Price or Promotion?

Let's pretend you are the marketing executive at an online retailer.

You have $100,000 to spend acquiring new customers. You can acquire them via normal methods, or you can offer prospects a 20% off your order of $100 or more promotion.

The projected short-term, and long-term results, are included in the following table. Which strategy would you employ, and why?

Profit and Loss Statement

Acquire With
20% Off Order

No Discount of $100+

Customers Acquired 3,400 5,263
Average Order Size $110.00 $135.00

Total Demand $374,000 $710,526
Profit Factor 27.0% 27.0%
Contribution $100,980 $191,842
Marketing Expense $100,000 $100,000
Discount Expense (70% Utilization) $0 $99,474
Net Profit $980 ($7,632)

Profit per New Customer $0.29 ($1.45)
Long-Term Value/Profit $20.00 $18.00

Total Short + Long-Term Profit $68,980 $87,105

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