July 01, 2013

Two Items

You have two items:
  • Item #1 was promoted in your catalog, generating $10,000 in demand and $1,000 profit.  Not bad!
  • Item #2 was not featured in your catalog.  It generated $3,500 in demand and $1,700 profit.
Which item do you prefer?

Most of you prefer item #1, don't you?

"It sold more!".

"We captured market share!".

"Businesses grow or they die."

There are reasons for favoring item #1.  At a $25 price point, it means you sold 400 units, most likely to about 350 customers.  For item #2, you most likely sold 140 units to maybe 125 customers.  Item #1 gives you what I call "file power".  I'm a big advocate of file power.  I'll take an incremental customer over an incremental dollar of net sales any day of the week.  In this case, you get both - incremental customers and incremental sales.  Incremental customers are good, because they pay us back in the next 1-3 years.  Ask Amazon how they feel about incremental customers.

There are reasons for favoring item #2.  Two big reasons.  First, you didn't have to spend ad dollars to generate the sales.  Sales that are generated by brand loyalty are more valuable than sales generated by advertising.  You get to save the ad dollars, and possibly do something else with them that will generate sales.  Second, you generated more profit.  Now, I get it, nobody looks at profit anymore.  It's only the most important metric in your whole business, it's the metric that allows us to earn a salary.  Without profit (or cash), you're sunk.  This item generates more profit/cash than the first item.  Therefore, in many ways, it is more valuable.  The incremental profit increase allows us to invest in advertising, buildings, new businesses, new items, salary increases, bonuses, you name it.  Business leaders that prefer item #2 and reinvest profit/cash in new activities tend to find a path to the future faster than those who are cash strapped due to a 30% ad-to-sales ratio.

Each item possesses strengths.

Which strength do you favor?

The strength you favor says a lot about the type of business you desire to create.

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