November 12, 2020

Testing Budget

Earlier in the week, I mentioned that I used to negotiate with the CEO of the Online Division at Nordstrom for my testing budget.

In other words, we had a discussion each year, and we pre-agreed upon the sales/profit impact of my tests.

I recall in 2003 that the budget was set at 3% of sales. For a $350,000,000 division, this was roughly $10,000,000 in sales and $3,000,000 profit. The CEO was willing to lose $3,000,000 profit because what was learned in executing the tests was worth $3,000,000 profit.

If you do your job as a Virtual Chief Performance Officer properly, you'll generate enough downstream profit to more than make up what you lose executing the tests.

Do you have a testing budget?

Odds are 90% of you don't have a testing budget, and that says something about your historical ability to prove that what you learn from testing has long-term value.

For instance, the testing budget at Nordstrom was what we used to determine that catalogs (via holdout tests) generated no incremental profit to the company ... which allowed us to allocate $36,000,000 of ad-cost to other activities ... half to paid search ... which generated a profit ... which caused our online sales to increase when we pulled all that paper out of the ecosystem. The testing budget (where we were willing to lose $3,000,000 profit per year to learn) allowed us to learn enough to make tens of millions of dollars of profit.

That's what you can accomplish as a Virtual Chief Performance Officer ... implementing a simple testing budget and a credible testing plan and a communication plan for the results of your tests.

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Tony Hsieh

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