May 29, 2008

Great Moments In Database Marketing #6: Long-Term Impact of Promotions at Eddie Bauer

We go back to 1998 for this Great Moment in Database Marketing.

At the time, I was Director of Circulation at Eddie Bauer, a brand that was punch-drunk on promotions. Anytime a customer failed to purchase in six months, the "CRM/Circulation" process offered the customer a "20% off $100" promotion ... twenty percent off your next order of one-hundred dollars or more".

We tested these promotions until we were blue in the face. Continually, they showed that the customer spent about twenty percent more if offered this promotion.

So, the promotions became part of "what we did". And then my team decided to execute a long-term test. For the next six months, we would not offer a segment of lapsed customers a single promotion.

What do you think happened?

Take a look at the following table, a table that approximates the actual results of the test.

Eddie Bauer Six Month Promotion Test: 1998

Receive No Incr-

Promos Promos ement

Month 1 $10.80 $9.00 $1.80
Month 2 $9.00 $9.30 ($0.30)
Month 3 $10.80 $9.60 $1.20
Month 4 $9.00 $9.90 ($0.90)
Month 5 $10.80 $10.20 $0.60
Month 6 $9.00 $10.50 ($1.50)

Demand $59.40 $58.50 $0.90
Net Sales $41.58 $40.95 $0.63
Gross Margin $22.87 $22.52 $0.35
Marketing $9.00 $9.00 $0.00
Promos $4.07 $0.00 $4.07
Pick/Pack/Ship $4.99 $4.91 $0.08
Profit $4.80 $8.61 ($3.80)
% of Sales 11.6% 21.0% -9.5%

Oh oh.

Here's the 411 folks. When customers are continually promoted to, they delay purchases until the promotion is offered to them.

In our test, if customers were not offered promotions, they slowly began to "build momentum". Instead of the every-other-month cadence of promotions to this audience (the actual test had a different rhythm than illustrated above), the customer waited for promotions, did not receive them, then started spending more.

After six months, we noticed that customer spend in the two groups was nearly identical!

Now look at profit. Sure, the group that received promotions appeared profitable --- they appeared profitable via every system we had in the company, via every A/B test we executed.

But when viewed via a long-term A/B test, the results were significantly different. We were losing a boatload of money promoting to customers who would ultimately spend the same amount of money if we didn't execute the promotion.

In 1999, we dramatically pulled back on promotions. Total Net Sales decreased by maybe five or six percent. Total profit hit an all-time record high.

The core fundamentals of direct marketing are often violated in the world of "instant metrics" we've created. Our e-mail marketing friends read open rates and conversion rates from a "Free Shipping" e-mail within an hour of blasting the campaign. The adrenaline rush felt from obtaining instant access to customer behavior fuels strategy.

My challenge to the e-mail marketing and web analytics community, two communities that live and die by a steady diet of exhilarating and instantaneous metrics, is this ... do your metrics allow you to understand if what we observed at Eddie Bauer in 1998 is happening in your business? And if your visit-specific metrics don't allow you to observe a trend like this, what kind of systems/software/human investment is needed to allow for this style of measurement?

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