Prices Up, Customers Down

Recall our paid search scenario from yesterday.

• 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.

The following year your merchandising team increases prices via introducing new items at higher price points. As a consequence, average order values increase 10% but conversion rates decrease 10%. On the surface, this dynamic should result in flat sales, right?

But something else interesting happens. Take a look.

• Spend = $100,000.
• Clicks = 200,000.
• Cost per Click = $0.50.
• Conversion Rate = 1.8%*0.909=1.64%.
• Orders = 3,280.
• Average Order Value = $110.
• Profit Factor = 30%.
• Profit = (3,280*110)*0.30 - $100,000 = $8,240.
• Profit per Order = (8,240 / 3,280) = $2.51.

Did you see what happened?

• Customers/Orders = Down 9%.
• Profit per Order = Up 13%.

Price increases typically result in fewer customers, but the transactions you generate are more profitable (per customer), meaning you can actually increase marketing spend to find a few additional customers. And you'll want to do that, because if you don't do that you'll eventually grind your customer file down by 5% or 10% and then you'll have growth issues in the future.