March 12, 2018

Tanking and LTV

The Memphis Grizzlies are having a hard time winning ... by design. They've lost 18 consecutive games.

In sports, there is a term ... called "tanking". It's a path used by bad teams in the NBA to guarantee that they can draft one of the handful of really good players coming out of college. There might be 30 first-round draft picks, but only three or four might be "game-changing" players. As a result, there is an incentive to not be average ... you either have a title-contending team, or you "tank" and hope to get one of the first three or four picks for a couple of years which "may" lead to having a title-contending team.

As long as an NBA team can stay in business (and television contracts enable everybody to generate enough cash), there is an incentive to either win big or lose big.

In baseball, the last two World Series winners (Cubs, Astros) essentially "tanked" their way to titles. They sent their better veteran players away, they lost a ton of games for several years while younger (cheaper) players developed into quality players, and then they won the World Series. Other teams took notice. This past winter, the market for highly priced free agents dried up. Why would a middling team (or a losing team) pay $10,000,000 or $15,000,000 for a player that might allow a 78 win team to become an 81 win team? And why would a team expected to win 68 games do this to become a team that wins 71 games? You spend money and you don't get closer to making the playoffs.

Again, there is no incentive to be "in-the-middle". If you are going to be a bad team, be a bad team with a purpose. Develop young players.

Tanking is a form of lifetime value. You are measuring the long-term value a player who you paid/pay a lot of money for and who will contribute short-term wins that have no long-term value or short-term value and you say "NO" and you purposely lose even more games.

And as more teams try to lose more games you end up with an odd situation where really bad teams have more bad teams to compete against, allowing them to win more games with less talent and less expenditure.

How does this relate to your business?

Two ways.

Most of us have profit-per-new-customer guidelines. If a customer won't pay back in the long-term, the customer isn't acquired. By the same token, we can't afford to lose too much money acquiring the customer, because then we won't get paid back. This is the situation some of our vendors are trying to exploit. They'll tell us to embrace a two-year or three-year payback ... they do this to keep us spending money with them. They are asking us to "tank" ... they are asking us to lose money today so that we can win tomorrow. If you've run your long-term simulations, you know if this is smart or not (and it's easy to run the simulations ... you should be able to quote an answer right now).

The second way is with new merchandise. Each new item has a lifetime value associated with it. The new item may be a winner and generate sales for six years ... or the item might die quickly and be discontinued within three months. Merchants "tank" all the time ... they discontinue winning items quickly in an effort to introduce new items that they feel are "brand appropriate". The new items are like the Cubs/Astros tanking ... those two teams brought in new players who developed and became stars and ultimately won a World Series. In the short-term, over-expanding on new merchandise while discontinuing winning existing items will cause a performance hit.

There's a lot of crossover between what sports teams do and how our businesses are analyzed. Baseball's "Moneyball" revolution is coming to commerce. In commerce, we have all the metrics we need to run successful campaigns. We have too few metrics to evaluate the short-term vs. long-term tradeoffs we need to make to be successful.

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