November 28, 2010

Chasing Returns

The topic is "Chasing Returns", inspired by a blog post that I read this morning.  The article talks about chasing returns in a market that one does not understand.

This weekend, we deal with Black Friday and Cyber Monday.  These are discount and promotion oriented events cheered on by the media, by trade organizations, and by marketers with a lust for driving sales increases without regard for generating gross margin.

One of my favorite stories came a few years ago, on Cyber Monday.  A business leader told me that he saw Cyber Monday promotions from his competitors in his e-mail inbox at 7:00am, then told the e-mail marketing manager to hold the delivery of the e-mail campaign for an hour so that the promotion could be changed, from 25% off plus free shipping, to 35% off plus free shipping.  I asked the business leader why the change was made?  The business leader replied ... "Because we had to remain competitive!"

This is an example of chasing returns in a market that one does not understand.

You don't do things because a trade organization cheer leads an event that gives attention to the trade organization.

You don't do things because a competitor does them.  When you are at Six Flags and your child wants cotton candy and already had cotton candy, you don't look around at your competitors (other parents) and then say, "Ok, not only do you get cotton candy, but you get a double-sized cotton candy because I've got to remain competitive" ... do you?

You do things because you thoroughly understand both the short-term and long-term consequences of your decision.

The short-term consequences are easy to understand, you run a promotion, and sales increase by 46%.  This is "chasing returns", you see sales increase, so you discount more often, with bigger and better promotions.

If you can answer the following set of questions, then you're free to run whatever promotions you want.
  1. If you did not run one single promotion for six months, how would company profitability change?  In other words, do you know if customers will purchase at the same rates, over time, if you do not run a single promotion?
  2. If a customer purchases using a promotion, will the customer purchase at full-price in the future, or have you trained the customer to purchase when you offer promotions?
  3. Does the impact of promotions "sustain" over time?  In other words, if you offer 20% off plus free shipping and you get a 30% sales lift, will you get a 30% sales lift when you offer the same promotion next year at this time, or will you have to increase the percentage off in order to obtain the same lift?
  4. Does your promotion cannibalize sales from surrounding days?  In other words, do you lose full-price sales in the first fifteen days of November because the customer knows you'll offer promotions on Black Friday and Cyber Monday?
If you can answer each question, based on prior test results, then run whatever promotion you want.

If you cannot answer each question, then you are chasing returns.  And we all know how well that worked for the financial industry and for the sale price of the homes we live in.

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