## March 29, 2017

### File Power and Extra Customers

In my projects, it is common to witness a company that becomes addicted to discounts/promotions. Vendors love this strategy, because it means that marketing technology is needed to "target" the discounts and "measure" the results.

Customers like discounts, too.

Your CFO does not like discounts.

We're all told that you use discounts/promos to improve customer quality. And when you measure metrics not called "profitability", you often find that you do improve customer quality.

File Power, however, deals with the future profitability of your customer file. When you train customers to purchase via discounts/promotions, you hurt future profitability.

See the graph above?

In one project that was the relationship between last year's gross margin percentage (after subtracting discounts/promos) and next year's gross margin percentage. What do you observe?

Yup - next year's gross margin percentage is worse when this year's gross margin percentage is bad.

So here's the challenge you face. Let's say that you could have gotten 10 customers to purchase at full price - but instead, you get 12 customers to purchase at 30% off.

Next year, we model File Power.
• 10 Full Price Customers.
• Probability of Buying Next Year = 40%.
• Amount Spent Next Year = \$200.
• Next Year's Predicted Gross Margin = 60%.
• Next Year's Pick/Pack/Ship Expense = 10%.
• Next Year's Predicted Ad Cost = \$15.
• Next Year's Predicted Profit = 0.40 * 200 * (0.60 - 0.10) - 15 = \$25.00.
• Total File Power = 10 Customers * \$25.00 Profit = \$250.00.
Here's what File Power looks like for 12 customers purchasing at 30% off.
• 12 30% off Customers.
• Probability of Buying Next Year = 42%.
• Amount Spent Next Year = \$205.
• Next Year's Predicted Gross Margin = 50%.
• Next Year's Pick/Pack/Ship Expense = 10%.
• Next Year's Predicted Ad Cost = \$15.
• Next Year's Predicted Profit = 0.42 * 205 * (0.50 - 0.10) - 15 = \$19.44.
• Total File Power = 12 Customers * \$19.44 Profit = \$233.28.
Do you see what happened?
• You increased buyers by 20% (from 10 to 12).
• You decreased future profit from \$25.00 per customer to \$19.44 (-22%).
• You decreased File Power from \$250.00 to \$233.28 (-7%).
You measure File Power, right?

In other words, you know whether your discounts/promotions increase the power of your customer file, or decrease the power of your customer file. Right?

In this case, the promotion needs to increase the number of buyers by about 30% to cover the loss in File Power caused by the promotion.