December 02, 2019

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.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.

Make Sure You Measure It

You measure the future value of Black Friday and Cyber Monday customers, right? Right? As long as you are going to burn all of these discoun...