If You Thought 20% Off Was Bad ...

Remember our example from last week?

We were talking about 20% off, and we were discussing how you had to sell 83% more units to increase demand by about 46% to generate equal levels of profitability compared to selling at full price.

Of course, there aren't many of us who are out there selling at a paltry 20% off. And with Cyber Monday just around the corner and trade journalists screaming about discounts leading to "another record" event (which allows them to get clicks and to get paid by the vendors who support your CRM efforts to promote Cyber Monday discounts ... interesting, don't you think?) ... you're more likely to be closer to 40% off than 20% off.

In our example above, how many units do we need to sell if we bump things up to 40% off?

Hint - it's a lot of units.

We need to sell 11 times as many units, generating more than 6x as much demand, to achieve the same level of profitability.

In other words, one of three things (or all three things) are happening when you see a brand offering 40% off.

1. The business is dying and nobody is buying the merchandise, leaving the company with no choice whatsoever but to discount heavily to move through inventory.
2. The business has gross margins that are north of 70%, allowing for a cycle of fake markups and brisk discounts.
3. The business employs professionals who do not understand math.

Keep 1/2/3 in mind when you look at discounts on Cyber Monday in a few weeks, ok?

Your job is to do what is right for your business, not what is right for other people.

Generate profit.


P.S.:  If you are frustrated with discounts about discussions (and my unsubs suggest you don't like it when I point out the math behind discounts), then read this from Stitch Fix ... about personalized communications (click here). There are so many ways to be successful ... ways that have nothing to do with discounting merchandise because customers aren't as responsive as you forecasted them to be. 

You Need To Move A Lot Of Units To Make The Math Work

"The Industry", largely comprised of your vendor partners, wants you to use discounts / promotions to tickle the buying bone of today's price sensitive customer ... or so they tell you. Just look at the lather they get themselves into talking about Cyber Monday, for instance.

But is discounting right for your business?

You need to move a lot of units to make the math work.

Here's our example from yesterday, taken one step further down to contribution. Look at how many additional units you have to sell at a 50% gross margin and 20% off in order to make the numbers work.

At just 20% off with a 50% gross margin and a $3 cost per item for pick/pack/ship, you need an 83.3% increase in units (which nets out to a 46% increase in demand) just to make the math work.

Just let that sink in for a moment.

In fact, let that sink in for the weekend.

I'll come back to the topic next week, ok?

Discounts

Let's evaluate discounts / promotions within the context of the "Great Eight".

There's no greater temptation than to offer 20% off (or more) when business is not accelerating.

Your vendor partners love it when you discount, because you use their tools to sell more units in the process. Your merchandising team "might" appreciate the discounts as long as they move enough units to open up their buy for more new merchandise in the future. Your CFO likely doesn't enjoy discounting for obvious reasons.

Within the Great Eight, here's where discounting plays a role.

AUDIENCE:  Discounting fundamentally changes the audience. Ask Apple / Google if you want to understand the dynamic ... Apple owns affluent customers and most of the profit ... Google/Android owns a large swath of customers and the scraps of profit associated with a lower-priced category. Discounting pushes you into the "scraps of profit" audience. Full priced selling is MUCH harder and MUCH more profitable.

AWARENESS:  How are you going to communicate to those who don't buy from your brand that you are discounting?

ACQUISITION:  Google/Facebook want you to discount because that drives more traffic their way, which fattens their bottom line. The less profit you make, the more profit they make. Fun business, huh?

WELCOME PROGRAM:  Here's where your existing vendors love you ... now you leverage their tools (databases, campaign management systems, social, print, television, radio, billboards, retargeting) to communicate your wonderful 20% off opportunity.

ANNIVERSARY PROGRAM:  Again, your existing vendors love you ... you leverage their tools to communicate your version of Amazon Prime Day, and you give discounts to customers who haven't purchased in a year.

OPTIMIZATION PROGRAM:  Again, your existing vendors love you ... you might optimize your discounts using their tools, you might optimize customer long-term value, you might optimize the number of annual print pieces to send to a customer, you might optimize the number of email campaigns per week featuring discounts. In most cases, you'll be using vendor-based tools to get to a theoretical "optimal" outcome.

NEW MERCHANDISE:  Discounts can be used to move merchandise that isn't working, though there are many other ways to achieve a more optimal outcome (smarter inventory buys, using marketing spend to move units instead of discounts).

EXISTING MERCHANDISE:  See "new merchandise".

As you can see, discounts touch most areas of the "Great Eight" ... and are of particular value to the vendors selling solutions to you ... because smart discounting either requires you to use their tools or drives more units which results in their tools being more profitable to them. Vendors win when you discount. That's why you read so much about discounting and (in particular) loyalty programs.

Tomorrow, will talk about the other side of discounting ... profitability.

Carrying Capacity

In our simulation, we learn that there are different definitions of Carrying Capacity.

If the CFO demands that we maximize profit of acquisition based on one-year profit, then our Carrying Capacity is 37,678 new customers (at an investment of $500,000).

If the CFO demands that we maximize profit of acquisition based on five-year profit, then our Carrying Capacity is 45,000 new customers (at an investment of $1,000,000).

If the CFO demands that we maximize profit of acquisition based on ten-year profit, then our Carrying Capacity is 47,951 new customers (at an investment of $1,250,000).

Notice that the difference between spending $250,000 on customer acquisition and $1,250,000 on customer acquisition isn't great.

Notice that the difference between spending $250,000 on customer acquisition and $1,250,000 on customer acquisition is HUGE when evaluating 10-year profit.

In other words, we frequently optimize for short-term profit, and we wonder why our business never grows in a healthy manner.

Measure Carrying Capacity. If you want a healthy business in the long-term, you have no choice but to know what your Carrying Capacity is.

Underspending

Here's an example of the concept of Carrying Capacity for a brand.

Yes, I know, it's hard to read and it is a tiny image. There's a lot of data there. Click on the image for more details.

This company is making a killing on customer acquisition. It's spending a million dollars a year, and is generating $1.6 million in annual profit from customer acquisition. This company is simply not spending enough money to acquire customers.

Let's try a simulation. Instead of spending $1.0 million, let's spend $1.5 million acquiring new customers, ok?

We're less profitable after on year. We're less profitable after two years. We're less profitable after three years. But we're more profitable in years four through ten. After ten years of total profit summation, this strategy is more profitable.

The new Marketing Leader runs a bunch of simulated outcomes, then sits down with the CFO and comes up with a sound strategy for the business - one agreed upon by both the CFO and the new Marketing Leader.

Tomorrow, I'll share what the carrying capacity is for this business.

Carrying Capacity

Here's the biological definition of Carrying Capacity (click here).

In marketing, the Carrying Capacity of a brand is the amount of new customers that can be acquired while satisfying short-term and/or long-term brand profitability requirements.

There are few things more important to the new Marketing Leader than knowing the Carrying Capacity of the brand on Day One of a new job. The new Marketing Leader first sits down with the CFO and learns what the short-term and long-term profitability targets are. Then, the new Marketing Leader runs a handful of simulations, measuring what happens to both short-term and long-term profit as customer acquisition spend is varied.

Tomorrow, I'll show you an example of what Carrying Capacity really means to the new Marketing Leader.

Print

Every so often, I get one of those emails from the vendor community ... something about how print is critically important in a digital world. You know there is some sort of coordinated effort, because a popular vendor will say something and then a paper rep says something and then newsletters include the content and then consultants are talking about it and then clients say something to me about it ... see how that works?

So it got me thinking ... if print is in a period of resurgence as the industry says print is, then sales at RR Donnelley and Quad Graphics should be surging and those businesses should be healthy, right? Right?

Fortunately, each company issues quarterly sales updates and produces annual reports - in accordance with their status as publicly traded companies. And we're all able to read those statements and learn what is actually happening - as opposed to the content produced by the industry.

• Quad Graphics (click here).
• RR Donnelley (click here). 

There are interesting comments in the documents. Here's annual sales at Quad:

• 2013 = $4.7 billion.
• 2014 = $4.8 billion.
• 2015 = $4.6 billion.
• 2016 = $4.3 billion.
• 2017 = $4.1 billion.
• 2018 = Trending toward $3.9 billion.

Oh oh.

Look at what Quad says on page 7:

• "Over the past seven years, the Company has closed 41 manufacturing plants representing nearly 13 million square feet of under-utilized production capacity. This commitment to consolidating work into fewer facilities to maximize capacity is one key way Quad/Graphics maintains platform excellence and remains the industry's high-quality, low-cost producer."

Look at what Quad said about their 2018 outlook:

• "In 2018, the Company expects net sales to range from a slight decrease to a slight increase as compared to 2017 primarily driven by organic growth in the International segment, partially offset by the anticipated continuing volume declines in the Variable Print segment and price pressures in most parts of the business."

A comment from RR Donnelley:

• "The print and related services industry, in general, continues to have excess capacity and remains highly competitive and fragmented."

That only happens when supply exceeds demand - they built their infrastructure expecting a certain level of print volume and that level of print volume isn't happening.

Another comment from Quad - 21,000 employees as of today ... but 41 plant closures resulted in the elimination of 11,800 employees. That's a lot of contraction. A lot of that happens because of efficient operations. Some of that happens because print volume is in decline.

An RR Donnelley tidbit:

• If you invested $100 in RRD stock in 2012 you'd have $94 today.
• If you invested $100 in the S&P Small Cap 600 in 2012 you'd have $209 today.

Why share all of this information?

You can earn a TON OF PROFIT using a marketing channel that is in decline ... I've got many clients doing just that ... and Quad is generating profit in spite of the structural decline of the industry. Heck, people have been saying TV is dead for more than a decade, and it may well die sometime, but ask Fox News or CNN if they're printing money or not during this election cycle?

Make no mistake ... there isn't a resurgence in print. The industry is in structural decline.

The industry doesn't need to lie to you. If everybody operate with integrity, there'd be plenty of profit to go around, regardless of the long-term prospects of print.

Do what is right for your business. Make profitable decisions. That may include print. That may include other channels.