Have you ever executed a strategy like this? Business isn't great, and you need new customers and Management demands that you sell something RIGHT NOW or you will be fired. So you do the only thing you can do RIGHT NOW to keep your job.
- 40% Off.
- Free Shipping.
And guess what? Customers purchase something!! Who cares about the p&l implications of what you just caused, you needed to sell something RIGHT NOW or you'd lose your job and there was no way you were going to lose your job, was there?
You could have acquired 100 customers at full price.
You chose to acquire 140 customers at 40% off plus free shipping.
And then something awful happens.
The 140 customers you just acquired won't buy again unless you give them 40% off plus free shipping. Congratulations!!
This is a classic case of File Power Abuse.
You could have expected the following from 100 full-price customers.
- 30% chance of buying next year.
- $100 average spend in the next year.
- 55% gross margin (after subtracting future discounts and shipping +/-).
- File Power = 0.30*$100 = $30 ... Margin = $30*0.55 = $16.50.
- Total File Power Margin = 100 * $16.50 = $1,650.
Instead, you signed up for the following future from 140 discount/promo buyers.
- 33% chance of buying next year.
- $95 average spend in the next year.
- 30% gross margin (after subtracting future discounts and shipping +/-).
- File Power = 0.33*$95 = $31.35 ... Margin = $31.35*0.30 = $9.41.
- Total File Power Margin = 140 * $9.41 = $1,317.
See what you did there?
This is the third biggest File Power story of 2020. We traded our souls. By getting to keep our job RIGHT NOW we made it nearly impossible to have a quality job at the brand we love working for, long-term.
You measure File Power, right?