You run a series of tests, measuring how promotions work against an e-mail merchandising strategy offering customers compelling merchandise at full price.
At the end of your series of tests, here is what you learned:
No Promotions:
- % Of Delivered E-Mails With Clicks = 3%.
- % Of Clicks Converting To A Purchase = 2%.
- Purchasers Per 100,000 E-Mails Delivered = 60.
- Average Order Size = $100.
- Demand Per E-Mail = 0.03 * 0.02 * 100 = $0.06.
- Profit Per E-Mail = $0.018.
- % Of Delivered E-Mails With Clicks = 5%.
- % Of Clicks Converting To A Purchase = 3.5%.
- Purchasers Per 100,000 E-Mails Delivered = 175.
- Average Order Size = $110.
- Demand Per E-Mail = 0.05 * 0.035 * 110 = $0.1925.
- Profit Per E-Mail = $0.026.
Your Chief Merchant and Chief Marketing Officer do not want to make your business "promotional" in nature.
Promotions hurt the gross margin. Your Chief Merchant receives a healthy bonus if gross margin percentage is very high.
Your Chief Marketing Officer hates promotions, because she has been charged with growing a full-price brand.
Fortunately, the decision is yours. You are accountable for the e-mail marketing program, and you receive a healthy bonus if you grow e-mail demand, year-over-year.
Do you go with a low-response, full-price strategy? Or do you go with a promotional strategy that makes you look good, but fails to build partnerships with other executives? Do you "split the difference"?
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ReplyDeleteKevin,
ReplyDeleteI think this point so clearly illustrates so much of what is wrong with etailing today and the silo approach to business. It's all CYA (cover your a&%). I am amazed when merchants tell me they can't work on their X problem (improve checkout, category page, etc) because the team is too busy getting up the latest promotions. ARRRRRRHHHHHHHH. Sorry I just needed to let that out. Thanks.
What Bryan said.... ;-)
ReplyDeleteSheeesh, these are the same companies that "manage by the numbers. These are the things that make me want to stick a knitting needle through my ear.
So gentlemen, would you go with promotional e-mails, or would you compromise response to help your co-workers achieve their objectives?
ReplyDeleteThere's no doubt that the way we organize has an impact on how the customer behaves.
Kevin,
ReplyDeleteCan you explain your demand equation? and how did you get your profit per email to be $0.018 and $0.026? Is that just (total revenue) - (total cost to send the email) divided by emails sent?
As for your question, even if your goal as an email marketer is to grow email demand year-over-year, I would have to think that whatever you do has to be inline with the overall marketing strategy. If your overall strategy is to brand yourself as a full-price brand, you stay away from discounts in your email. If your goal is just to grow your sales and customer base, discounts would be fine. If its a mix of those, then mix up your emails with discounts and other content.
Demand = (Clicks / E-Mails Delivered) * (Conversion Rate) * (Average Order Size).
ReplyDeleteFor profit, I used a profit factor of, I think, 35% for full price merchandise, and 20% for sale merchandise.
Profit Factor = (Gross Margin % - Variable Operating Expense %).
To complete the profit calculation, I subtracted the cost of each e-mail, which was estimated at $0.003 each.
I don't understand why the only choice is price promotion or not. There are hundreds of promo ideas beyond price that can protect your overpaid executives margins and still generate great response.
ReplyDeleteAnonymous, can you share any of the hundreds of promotional opportunities you mentioned?
ReplyDeleteHi Kevin,
ReplyDeletePersonally, I'd be concerned about the long-term effects of frequently offering discounts/promotions. With a strategy of frequently offering promotions, subscribers may eventually begin to "expect" a certain minimum discount/promotion, and begin to treat that as the "regular" price. So over time, their response either drops, or your margins do because you have to offer them larger discounts/promotions.
We recently had a discussion of promotions/urgency tactics on our blog and the consensus seemed to be that excessive use of promotions leads to a loss of credibility for the marketer, which can negatively impact your repeat business.
If you're consistently bringing in new subscribers whose expectations haven't yet been set - enough that you can keep up the numbers you cite for the "with promotions" strategy - then go for it. But for the reasons above, I'd be worried about the per-email profit shrinking in the long run if you went full steam ahead on the "with promotions" strategy.
Kevin,
ReplyDeleteI guess my question is how does that formula calculate demand? What is the thinking behind the formula?
There are two ways to calculate demand in most cases, the easy way, and the way I chose to calculate it.
ReplyDeleteThe easy way is to take what you sell, and divide it by the number of e-mails you send. For instance, if you sold $100,000 of merchandise, and you sent 500,000 e-mails, demand per e-mail is (100,000) / (500,000) = $0.20.
Demand per e-mail can also be calculated via the geeky formula I used.
Demand per E-Mail = (% Of Clicks) * (Conversions Per Click) * (Amount Spent per Conversion).
If you send 100,000 e-mails, and 5% of the people click through the e-mail to the website, and 4% of the clicks convert to a purchase, and each purchaser spends $100, you have ...
... = (0.05) * (0.04) * (100)
... = (.002) * 100
... = $0.20.
Notice that I get the same answer as when I take total demand and divide it by the number of e-mails delivered.
Justin, good points, thanks for contributing, and for pointing us to your blog!
ReplyDelete