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.
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