After You Cut The Budget ...

So this brand cuts the paid social budget by 10% for one year ... sees that profit is optimized, then says they'll cut it by 10% for each year thereafter. What happens to profit?

You make more profit in year one ... $276,971.

You make more profit in year two ... $177,298.

You make more profit in year three ... $74,101.

You make LESS profit in year four ... $16,253.

You make less profit in year five ... $98,671.

The decision looks good over time ... you're up $413,446 over time. 

But the brand begins to lose money by year four.

So cutting the budget consistently seems to work ... for awhile.

Then you'd have to cut the budget further to make the numbers work.

Here, the budget is cut by an additional 10% in years 4-5 to make the p&l work.

The business keeps getting more profitable.

The top-line keeps shrinking.

Paid Social marketing spend keeps shrinking.

This is the thing about marketing. You can find ways to optimize your investment. And then to keep investing it you generally keep cutting ... and you keep getting smaller ... and eventually somebody is going to say "enough".

Business is so much more interesting than we give business credit for being. It's so darn much fun to learn how all this stuff works out.

Our Natural Instincts

We tend to optimize in the short-term, and for good reason. We earn a bonus when we do that. We get to keep our job when we do that.

Now, let's go back to our paid social example. This time, we're going to cut spend by 10% for next year? What happens?

It's a good short-term decision. Demand decreases by $1.3 million, ad cost decreases by $709,000, profit increases by $277,000. Of course, you lose access to 6,406 buyers who then pay you $99,000 less profit in year two, $106,000 less profit in year three, $95,000 less profit in year four, and $88,000 less profit in year five. You lose out on $111,000 of future net profit ... you make $277,000 this year but lose $388,000 profit thereafter.

Bad decision to cut spend here.

In general, our Marketing Budget Experiments suggest we're sub-optimizing our future by optimizing the present. What we've been taught about modern marketing is generally wrong.

P.S.:  If the 29 year old Kevin had heard modern Kevin say this, 29 year old Kevin would have not wanted anything to do with modern Kevin. Well, times change, and we have to change as we learn how the world works. If we don't invest in marketing, we sub-optimize the future.

Not Looking At It The Right Way

Here's a brand that is paying too much for Paid Social at this time ... or so it seems.

In this Marketing Budget Experiment, we increase Paid Social spend by 10% for the next year. We spend $709,000, and we don't get a whole lot in return.

• Demand increases by $1.2 million.
• Profit decreases by $300,000.
• Incremental ROAS?  About 1.69. Yikes!

Every instinct you have says DON'T DO THIS!

But a funny thing happens in the future.

This brand converts 3,836 existing customers to an incremental purchase. It generates an additional 2,227 new/reactivated customers. Those customers begin doing their job ... they start paying you back.

• $94,000 profit in the second year.
• $100,000 profit in the third year.
• $90,000 profit in the fourth year.
• $84,000 profit in the fifth year.
• A net gain of $67,000 profit across five years.

In other words, this is a good decision if you are trying to protect the long-term health of your brand.

In a digital world, with digital analytics and industry-standardized metrics like ROAS, we optimize in the short-term. We generally don't care about the future ... as an Executive once told me, "there's not a great chance I'll be there for the future anyway so why would I optimize for it?"

We optimize for it because it is the right thing to do. We're not looking at the problem the right way.

Warning Signs

Strong thunderstorms have shelf clouds. These clouds warn you that a spicy storm is approaching.

There are shelf clouds associated with your business as well. Shelf clouds tell you when danger is on the horizon. You are quite familiar with many of the concepts.

1. Reduction in new item introductions.
2. Poor performance of new item introductions.
3. Reduction in the number of winning items.
4. Sales volume of winning items is in decline.
5. Discontinued winning items.
6. Prices increase, leading to the decay of rebuy rates / new buyer counts.
7. Marketing investment is reduced for no good reason.

All of these are shelf clouds. They are clear indicators that trouble is on the horizon.

A simple dashboard that points these concepts out to all employees goes a long way toward mitigating shelf clouds in your business.

Payback Window

When introducing the concept of Marketing Budget Experiments (click here for pricing details), I shared thoughts on payback windows.

If you want to optimize payback quickly, you cannot invest as much.

If you want to optimize profit long-term, you usually have to invest much more than you think is appropriate.

Remember those fun days ... twenty years ago ... when the pundits said Amazon would never make money? Instead of generating profit, they reinvested everything they had ... they avoided paying taxes in the process ... and today, look at where they are?

There is a lot of talk about contraction these days. The COVID-bump days are years in the rear-view mirror, the bump is pretty much unwound right now, and increased costs are causing people to think about contraction. Contraction, by definition, shortens the payback window, optimizing today in exchange for a reduced tomorrow.

More important, the shorter your payback window, the more you sub-optimize the future. Trying to nail things down this year means subsequent years will be worse.

When AI Lies

I won't go into all the details here ... but I asked ChatGPT to pretend to be a first-year Forrester Research analyst and offer three ideas for saving Bed Bath & Beyond from Bankruptcy. None of the solutions included merchandise, the product BB&B actually sold.

I then asked ChatGPT why it didn't offer any merchandise solutions? It responded by offering me merchandise solutions. I asked the app if it didn't offer me merchandising solutions because it was pretending to be a first-year Forrester Research analyst? The app told me that "it did originally offer me merchandise solutions."

I told ChatGPT that the statement was a lie - it originally offered me marketing solutions.

ChatGPT then said "you are correct, I only originally offered you marketing solutions."

In other words, I was able to catch ChatGPT in a lie, a lie the application admitted to.

What happens when humans are not smart enough to catch AI in a lie?

Do not cede your corner of the world to AI, and if you choose to do just that, do so at your own peril. Don't doom us.

P.S.: Log into your account and give it a try: https://chat.openai.com/auth/login

When A Handful Of Vendors Put You In A Tough Financial Spot

The email said "will these constant paper and paper pricing issues subside?" The email was from a seasoned catalog veteran, somebody who has seen it all ... and in response to seeing it all, is shifting dollars as fast as she can into digital tactics.

In this Marketing Budget Experiment, paper/printing/postage costs increase 5% per year and just keep increasing 5% per year. If everything else remains constant, the p&l suffers.

Oh my goodness.

This brand (> $200,000,000 in annual sales) gives up a whopping $16,000,000 in profit over five years. It did nothing wrong - it's just going to hand profit over to paper/printing/postage folks who pass cost increases along to them.

Your CFO doesn't like this story. She's going to demand you make draconian cuts to "save the p&l". So you do that. You cut out 60% of the circ to make the p&l look GREAT next year. But then you end up in an ever-downward spiral where you never have enough customers to fuel the success of your brand. Now your p&l looks like this.

Your CFO did this to your brand. Without access to Marketing Budget Experiments, nobody could see that a ton of short-term decisions led to long-term pain. You literally optimize your way out of business over time. Oh sure, there's still profit to be had. But if you keep trying to optimize every-single-year instead of suffering the long-term consequences of vendors taking your profit, you toss your brand into the vortex - you swirl into oblivion.

Two years of emails from exasperated catalog leaders ... "how do we deal with these paper people?". 

You need to show them each scenario. If you let them take your profit, you are much less profitable. If you try to optimize and cut back as a consequence, you enter the vortex and have no future (which means they have no future).

Don't do the latter.

Have a stern conversation about the former.

Behind the scenes, be darn sure to shift your marketing dollars to modern channels, ok? It's time.

A Little Bit Means A LOT!

I harp on Merchandise Productivity, and for good reason.

Now, you can get customers (via marketing) to add items to orders, and that's always a good thing.

The best thing, of course, is to sell stuff that customers want to purchase. Easier said than done. Getting more customers to buy stuff is really important.

But the results are indisputable. Look at this Marketing Budget Experiment. Here, merchandise productivity increases rebuy rates and new buyer counts by 5% for just one year. Just one year.

In year one (the year merchandise productivity increased by 5%), profit increased from $35.6 million to $39.4 million. An additional 52,643 customers purchased.

Look what happens thereafter. Remember, merchandise productivity returns to normal for each of the next four years.

• Profit is $1 million higher, then $0.9 million higher, then $1.0 million higher, then $0.9 million higher, then $0.8 million higher. That is "interest" being paid by having a good year!
• Customer counts are still higher ... compound interest for having a good year ... 17,090 then 15,242 then 13,715 then 13,007. 
• Sales increased by $11 million in the year with good productivity, then increased $19 million thereafter.

What you do today impacts tomorrow. You generated $19,000,000 in future sales and $3.5 million in future profit without having to do ANYTHING because you had a good year in year one.

Show of hands ... how many of you have had your analytics staff or your favorite vendor produce this information for you in a tangible fashion? As an industry, we need to start thinking more carefully about building businesses for long-term health. We can do that ... by fixing things today!

Crazy Events

Has your brand ever been impacted by crazy events?

Two things can happen. Twenty years ago at Nordstrom, Oprah decided to bless us with a positive comment on her show and POW sales went through the roof on the item she blessed. For a while, anyway. Then it was back to normal, and the customers she brought in didn't come back and we learned a valuable lesson about "influencers".

The other thing that can happen is generally bad. I recall anarchists terrorizing businesses in downtown Seattle in the late 90s ... the WTO protests. They messed up a bunch of stores. Trade continued, regardless.

Or you could be Target. Sell what I tell you to sell, or I will blow things up. I've been telling you that merchandise is critical for nearly twenty years. Now it could get you killed.

I was once associated with a client that made a "blunder" according to the marketing folks. People lost their minds. When the brand analyzed sales performance over the next month, there was a very tiny short-term sales hit that was made up for weeks later and ... then ... nothing. No lost customers. No sales shortfall.

Do you remember Motrin Moms?

A refresher (click here).

It's always interesting to join the mob and go after something ... but then ... there's something new.

When crazy things happen to your brand, carefully measure what happens. Use the results to remind folks when the next crazy thing happens.

Yelling

I help run a pickleball club in my community. When something goes wrong, people call me. They yell.

There are times when yelling makes a difference. If you reserve your yelling for truly important issues, somebody will take notice that you are yelling, realize the matter is truly important, and do something.

When you yell about ALL issues, you are just a yeller. Not a good look.

And in 2023, when businesses are struggling with the logical and predictable issues associated with the buildup and crash of the COVID-bump, yelling is not a good look. Yelling doesn't solve a problem. It's time to do the opposite ... instead of yelling ... do something, be creative. Or trust your employees to be creative.

Just because your favorite cable news anchor yells at people doesn't mean you should be yelling at people. 

I Don't Have Control Over New Customers Anymore

We dig into the findings of a Marketing Budget Experiment. The CEO is anxious, because 72% of Paid Social customers are new, while 28% are existing buyers.

"It's like I don't have control over new customers anymore. In this case, I advertise but a quarter of my money is going to housefile customers."

E-commerce Executives would analyze that comment with a sense of bewilderment unmatched in modern marketing.

When I made the rounds in 2016, speaking all across the country about the importance of customer acquisition programs, folks would sit in the audience with laptops and phones, evaluating the companies I discussed. "That brand is at 30% off today. I guess their program doesn't work!" Well, no, that means their marketing staff don't know how to convert customers to purchase so they have to create a game. It does not mean they don't know how to bring traffic in to a website.

In 2016, print-based brands could still generate new customers via "control" ... tell the bulk name center (co-ops) they wanted 800,000 de-duped names, send a catalog, and six weeks later there were 10,00 new customers.

In 2020, people were quarantined in their homes - customer acquisition surged.

In 2022, the paper folks nuked the industry. It became horribly hard to even find paper to maintain the 40 year tradition of buying prospects in bulk.

So here in 2023, an old industry speaking to old prospects doesn't have the old tools necessary to control customers anymore. The laughable customer acquisition program discussed in 2016 becomes essential in 2023 if you want to have any chance of controlling anything.

The Customer Has No Value

Back in the days when clients paid money to have you on campus, there were times when a CEO or Marketing Executive just wanted to "touch base". I learned early in my consulting work that "touch base" sessions needed to be expensive. You don't charge $900/day to have somebody yell at you for eight hours. The key was to charge just enough to encourage a handful of "touch base" sessions but to dissuade the large number of sessions where somebody wanted to yell and was "frugal". Yelling/Frugal is a bad combination. If you want to yell and are frugal, I'll let you do that via Zoom for free.

"Frugal" is a bad word when it comes to customer acquisition.

One such CEO ... a catalog CEO ... wanted to discuss "customer acquisition theory". Theory is also a bad word, as it implies that the CEO can never be wrong because s/he is simply discussing theory. In this case, the CEO was frustrated that paid search customers had no value.

Here's what the math looked like:

• New Catalog Customer = 35% Rebuy Rate, $170 Spend per Repurchaser, 40% Profit Factor, $12.00 Annual Marketing Expense, $11.80 Variable Profit in Year One.
• New Paid Search Customer = 25% Rebuy Rate, $160 Spend per Repurchaser, 40% Profit Factor, $10.00 Annual Marketing Expense, $6.00 Variable Profit in Year One.

He presents this data-driven argument, tells me that the Paid Search customer has "no value", and wants to abandon paid search.

He is wrong, of course.

Just because a customer is less valuable doesn't mean that a customer is not valuable. The customer is simply different.

The CEO became frustrated. "Why would I acquire a customer worth half as much as my catalog customers?" I answered "Because the customer generates enough variable profit to offset fixed costs." This was apparently the wrong answer to offer during a "touch base" ... the CEO became more upset. "This customer won't even buy from my catalogs." I told the CEO that "You don't care if the customer purchases from your catalogs, you only care that the customer purchases." Visibly angry now, the CEO says "What am I supposed to do, acquire two lousy customers to make up for one catalog customer?" I replied "yes".

Here we are, in 2023. A fusion of low co-op response and a paper industry charged with destroying the expense structure of a catalog that resonates among customers age 60+ mean that it is terribly hard to acquire new customers via print.

The choice is to now acquire two customers at $6.00 each instead of one customer at $11.80. The customer that has no value is now "the" customer. On Maslow's Hierarchy of Needs, we're moving toward Acceptance.