Yesterday we talked about giving a segment of customers (Recency = 3, Frequency = 1) a 30% off promotion.
The key is to get enough customers to respond that even if you lose money on the promotion you make up profit downstream because you did a good job of developing your customer file.
Let's see if our example pays off.
Click on the image to see the details.
The details? You lost a fortune on the promotion, giving money away to all responders (not just the incremental 50% gain in response). However, you generated 32 responses (per thousand) instead of 21 (per thousand). Those customers now have Recency = 1, Frequency = 2) and are much more responsive. The table clearly shows that you generate a lot more profit downstream from 32 respondents than you generate from 21 respondents.
Look at the bottom row.
When you add up the short-term disaster of the promotion and the long-term gain of developing your customer file, you end up with less profit.
In other words, in this example (your mileage will vary ... but you're probably doing this type of math to understand if your customer development methods work ... right?) the discounting strategy is a failure.
But not all strategies are failures. More on that next time.