January 07, 2019

But We Made More Profit!!

There's a reason that discounts, promotions, free shipping, exponential ad cost, and loyalty programs all permeate marketing.

Somebody, no matter how lousy the technique, measured the program and decided that executing the program generated more profit than not executing the program.

Here's the kind of example I run into every day:
  • Demand - Returns = $1,000,000.
  • Discounts / Promotions = 20%.
  • Net Shipping Expense = 5%.
  • Marketing Advertising Cost = 25%.
  • Net Loyalty Expense = 5%.
  • Cost of Goods Sold = 35%.
  • Marketing Margin = $100,000 ... or 10%.
The marketer will respond with the time honored line ... "we measured this stuff and we make more profit when we execute our campaigns".

One of my favorite career stories happened at Eddie Bauer in 1998. That company loved discounts and promotions ... and my staff had all of these individual tests that "proved" that the discounts/promotions worked. I worked with one of my analysts - we executed a six-month long test where we didn't give any discount/promotions whatsoever. Sales didn't change. Why? Because in the individual tests, the analytics folks only measured the promo window and didn't measure what happened after a promo ended (i.e. sales went up during the promo and went down after the promo ended).

Now go ahead and pull the promos out of the story and see what happens to marketing margin.

  • Demand - Returns = $1,000,000.
  • Discounts / Promotions = 0%.
  • Net Shipping Expense = 5%.
  • Marketing Advertising Cost = 25%.
  • Net Loyalty Expense = 5%.
  • Cost of Goods Sold = 35%.
  • Marketing Margin = $200,000 ... or 20%.
Your marketing margin should be above 25% if your business is healthy ... with the notable exception of when your cost of goods (i..e. Electronics) is very high ... then the rules change.

If your marketing margin is under 15%, you've consumed all of your profit potential with gimmicks. That's a bad thing ... bad for you, good for the vendors who support the gimmicks.

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