## March 30, 2017

### File Power and Ad Cost

Here's a fun one from the world of Retail.

I worked with a company that loved trying to convert online buyers to in-store buyers. Retail catalog after retail catalog after retail catalog - until that customer bought in a store. Then what? Way more retail catalogs!

Here was the scenario they created.

• Spend per Repurchaser = \$280.
• Gross Margin = 50%.
• Operational Expense = 10%.
• Next Year's Ad Cost = \$12.
• Next Year's Profit (File Power) = 0.50 * 280 * (0.50 - 0.10) - 12 = \$44.00.
• Spend per Repurchaser = \$285.
• Gross Margin = 50%.
• Operational Expense = 10%.
• Next Year's Ad Cost = \$18.
• Next Year's Profit (File Power) = 0.53 * 285 * (0.50 - 0.10) - 18 = \$42.42.
Among the customers who converted to stores, spending increased (0.53*285 vs. 0.50*280 = +8%). That's the kind of number that the omnichannel experts love to hear!

But profitability declined by 4%. The Power of the Crossover File (#multichannel #omnichannel) was/is worse.

I know, I know, folks should #optimize ad spend for this customer ... well good. But how do you know you should optimize ad spend for this customer unless you compute File Power?