Prices Go Up, Problems Start Appearing

In my pricing / forecasting projects ($4,900 ... kevinh@minethatdata.com), I establish a base case. From there, the goal is to see what happens to the business as prices increase. Yesterday we observed that profit is harmed when cost of goods increase.

Let's say we pass the cost along to the customer ... a 15% cost of goods in this example is $2.97, we simply pass $2.97 along to the customer. What happens?

Ok, the simulator shows us that ...

• Rebuy rates decrease by 3%.
• New buyers decrease by 2%.
• Spend per buyer increases by 2%.

In other words, we're going to keep demand/sales at a reasonable level ... on the right side of the image demand/sales decrease by just 0.3%. However, you work your way through the p&l and you see we're still down $2.5 million in profit. Not down $4.0 million, but still down.

Your CFO probably doesn't like that outcome, right?

Your CFO asks you to run a scenario where prices increase by 15%, matching the cost of goods increase of 15%. Ready?

Things are getting interesting.

• Rebuy rates will decrease by 8%.
• New buyers are forecast to decrease by 5%.
• Spend per buyer should increase by 5%.
• Annual Demand/Sales decrease by $1.1 million.
• Annual Contribution/Profit decreases by just $530,000.

This might be an answer your CFO is comfortable with.

It might not be a solution the Analytics guru is comfortable with. Why?

• The twelve-month buyer file decreases by 5.5%.
• This means that the demand/sales stabilization observed this year will be erased next year. Next year, without enough file power, sales are doing to decrease, costing you top-line volume and profit.

That's why you run simulations ... you need to know what happens in the future, and you need to know that you're always going to pay a price, in one way or another.

Tomorrow we'll talk about reducing the marketing budget (hint - not a great idea).