May 07, 2014

The Leaking Profit Bucket

In 1994, there was variable profit, and variable profit was good.
  • The customer spent $100.
  • The item cost $40.
  • The customer spent $15 to ship the item.
  • It cost $10 to ship an item.
  • The company spent $20 in marketing cost (catalogs) to generate the purchase.
  • The company generated $50 variable profit.
In 2004, there still was variable profit, but there was less of it.
  • The customer spent $100.
  • The item cost $40.
  • The customer spent $15 to ship the item half the time, got free shipping the other half of the time, generating $7.50 of income for the company.
  • It cost $10 to ship an item.
  • The company spent $20 in marketing cost (catalogs) to generate the purchase.
  • The company spent $3 on paid search to generate the purchase.
  • The company generated $34.50 variable profit.
In 2014, things are certainly spinning out of control.
  • The customer spent $100.
  • The item cost $40.
  • The customer spent $0 to ship the item due to a free shipping promotion.
  • It cost $10 to ship an item.
  • The company spent $15 in marketing cost (catalogs) to generate the purchase.
  • The company gave up $20 due to a 20% off promotion.
  • The company spent $3 on paid search to generate the purchase.
  • The company spent $1 to pay affiliates to send the order back to the website.
  • The company spent $1 on email marketing to send six blasts a week.
  • The company spent $1 on retargeting fees to facilitate the order.
  • The company spent $1 with Facebook to create awareness among "fans".
  • The company generated $8 variable profit.
Yes, of course, this is an exaggeration. It's designed to get you to think. 

Please think about what you're doing. We're in a world where there appear to be three options.

  1. Proprietary Merchandise that yields a premium price and healthy gross margins.
  2. A race to the bottom, where, as always, there can only be a handful of winners.
  3. Pricing games that allow a "brand" to only give away the farm to smart customers, generating all profit from uninformed customers.
Which option represents your business?

Email Marketing and Discounts

It comes up over and over again. The email marketing team wants to maximize open rates (not profit, mind you, open rates). How does one...