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.

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