December 01, 2019

Not Your Fault

This just keeps coming up, so let's explore the dynamic a bit.

You have a paid search program. Last year in November you spent $100,000, and you obtained the following outcome:
  • Spend = $100,000.
  • Clicks = 200,000.
  • Cost per Click = $0.50.
  • Conversion Rate = 1.8%.
  • Orders = 3,600.
  • Average Order Value = $100.
  • Profit Factor = 30%.
  • Profit = (3,600*100)*0.30 - $100,000 = $8,000.
  • Profit per Order = (8,000 / 3,600) = $2.22.
This year, however, your merchandise productivity is -10%. Your metrics, as a consequence, look different.

  • Spend = $100,000.
  • Clicks = 200,000.
  • Cost per Click = $0.50.
  • Conversion Rate = (1.8%*0.90) = 1.62%.
  • Orders = 3,240.
  • Average Order Value = $100.
  • Profit Factor = 30%.
  • Profit = (3,240*100)*0.30 - $100,000 = ($2,800).
  • Profit per Order = (-2,800 / 3,240) = ($0.86).
Because of a merchandise productivity issue, marketing metrics look worse ... you generated $2.22 of profit per order last year, you generate a loss of $0.86 per order this year.

As a marketer, you're likely to "optimize" performance. You'll cut back on marketing spend, and your metrics change as a result.
  • Spend = $80,000.
  • Clicks = 179,000.
  • Cost per Click = $0.45.
  • Conversion Rate = (1.8%*0.90) = 1.62%.
  • Orders = 2,900.
  • Average Order Value = $100.
  • Profit Factor = 30%.
  • Profit = (2,900*100)*0.30 - $100,000 = $7,000.
  • Profit per Order = (7,000 / 2,900) = $2.41.
The marketer "optimized" performance. But there is a two-stage outcome that must be understood, an outcome caused by a 10% drop in merchandise productivity.
  • Orders dropped from 3,600 to 3,240 because of merchandise productivity declines.
  • Orders then drop from 3,240 to 2,900 because of how marketing responded to merchandise productivity declines.
In other words, a 10% drop in merchandise productivity results in a 19% drop in orders because marketing optimizes performance.

Now you likely have a new customer issue.

It's important to work carefully with your Chief Financial Officer on these issues. It may be more profitable long-term to lose money today and acquire enough new customers to protect the future of your business. Just be sure to do the math and figure out what makes the most sense for your business, ok?

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