May 03, 2022

Question Week: Question #3

Here we go:  "Kevin, on Twitter, you've talked about the importance of incrementality. I just don't understand what you are talking about. Can you share a couple of examples? Thanks, Paul."

Here are two examples.

First, let's assume you have two product categories, "Widgets" and "Bidgets". You decide to add a third category, "Ridgets". Below are sales totals by each category, in the year before and the year after "Ridgets" were introduced.

Year Before:  Widgets = $10 million. Bidgets = $6 million. Total = $16 million.

Year After:  Widgets = $8 million. Bidgets = $5 million. Ridgets = $4 million. Total = $17 million.

Now, there are a ton of reasons why the forthcoming analysis is flawed, but at a simple level, you generated an additional $1 million in sales. However, on paper, it looks like Ridgets generated $4 million in sales. From an "incremental" standpoint, 25% of Ridgets is incremental (1 million / 4 million). That's a bad thing. When < 70% of sales are incremental, profitability of the endeavor becomes suspect.

Here's another example. Let's assume you have a terrible SEO program, so you spend a ton of money on Google. Now you improve your SEO program. Sales for the year pre/post implementation look like this (again, there are a thousand reasons why this analysis is flawed, but I'm trying to illustrate something so you can understand the concept).

Year Before:  Organic Search = $2 million, Paid Search = $10 million. Total = $12 million.

Year After:  Organic Search = $8 million, Paid Search = $6 million. Total = $14 million.

Your incremental rate is ($14 million - $12 million) / ($8 million - $2 million) = 2/6 = 33%.

In other words, you generated very little in the way of incremental sales ... however, if you can spend less on paid search and have the dollars continue to spill over into organic search, you are much more profitable and your decision is/was a good one!!

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