Cutting The Marketing Budget

In my pricing / forecasting projects ($4,900 ... kevinh@minethatdata.com) I'm typically asked a common question.

• When we're facing tariffs or economic headwinds, it makes good sense to conserve money and not spend as much money on marketing activities, correct?

Well, this is the kind of question that made sense back in 1995, when we didn't have good tools to make decisions. In 2025, we have tools. The answer is "maybe". Your customer base and your p&l will decide the answer for you.

Let's say we simply pass the increase in cost of goods along to the customer. That scenario didn't look spectacular.

Demand/Sales don't look bad, but profit looks bad and the customer file contracts by about 2%. If your CFO is smart, she'll have you evaluate every marketing dollar to identify waste. If your CFO is not smart, he'll tell you to cut the digital budget by 30% ... just some dumb arbitrary number.

Well, we can simulate the 30% drop in the digital marketing budget. What happens?

All sorts of moving parts here.

• You spend $1.5 million less on digital marketing.
• You generate $1.7 less in demand/sales.
• Profit improves, and is now just 10% less than the year prior.

You likely noticed the problem, right?

• All of your good customer segments contract by about 4%.
• New buyers contract by 6% ... those digital dollars align with new customers, don't they?

Remember, these are simulated/modeled results ... we don't know that this is what will happen. We do have prior results that the simulation is rooted in. This is a better prediction than any guess anybody else is likely to come up with ... it's based on your actual customers and their behavior.

What is the right answer?

There is no right answer. There are hundreds of possibilities, all of them are bad, the more you eat the cost of goods impact the worse profit looks ... the more you try to mitigate short term profit pain you pay for it in the long-term.

But at least you have choices, right? That's what the pricing / forecasting simulation does for you. And I only charge $4,900 for it. Seems like a reasonable investment if you are going to be put in a spot where you are forced to pass along cost of goods increases to the customer.

P.S.: Next week we'll talk a bit about what happens to demand when you cannot physically sell products you planned to sell.

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).

We Start By Initializing The "Base Case"

In my Pricing / Forecasting projects ($4,900 ... kevinh@minethatdata.com), I start by initializing a "base case" ... what would happen under normal conditions, same prices?

This business is at equilibrium .... the customer file is at a comparable size year-over-year, which means sales/profit are comparably year-over-year. We now have our "base case".

Let's say your cost of goods increase by 15% this year. Let's say you keep prices the same, you eat the profit instead of the customer. Does the cost of goods increase eat up profit?

Look at that ... you eat $4,000,000 in profit.

You're not going to eat $4,000,000 in profit, are you? You'll pass the cost along to the customer. Tomorrow, we'll see if the customer is willing to eat up discretionary spend as a consequence.

As Prices Increase, Rebuy Rates Typically Decrease

When you hire me for a Price Impact / Annual Forecast project ($4,900), we evaluate the impact of pricing changes on categories over a three-year period of time. The data is noisy, understandably so, but leads us in a direction where we can measure the impact of prices on rebuy rates.

Here's an example for a company with seventeen categories across three years. I removed outliers, the relationship is not great but there is something here.

As prices increase, rebuy rates decrease ... as expected. In this case, if prices increase by about 20%, rebuy rates decrease by about 11%.

This is where things get interesting. If you lower the rebuy rate but you increase prices, you "can" make up the lost volume ... you can't make up the lost customers.

I model the impact on customer spend as well. Predictably, if prices increase, customers who do purchase spend more money.

We now have the pieces necessary to simulate what might happen in the next year if you are forced to increase prices. More on that topic tomorrow.

Email Click-Throughs

In a world where your business is being harmed on purpose (or not ... apparently tariffs may not apply to some iphones, for example ... hmmm, interesting ... wonder how that happens), you want the ability to not have to spend marketing dollars on your own customers while maintaining high levels of sales.

Email marketing gives you this blessing ... if you are a traditional catalog brand and you want to save money, segment your email subscribers as follows.

• Segment 1 = 2+ Purchases Via Email Marketing, Past Year.
• Segment 2 = 1 Purchase Via Email Marketing, Past Year.
• Segment 3 = 0 Purchases Via Email Marketing, 2+ Email Click-Throughs Past Year.
• Segment 4 = 0 Purchases Via Email Marketing, 1 Email Click-Through in the Past Year.

Any customer who fits into segments 1/2/3 does not need many(any) catalogs. Any customer who fits into segment 4 may or may not need 'em.

And while you are at it, when a customer clicks through one of your email marketing campaigns, it's time to kick off an Action Stream for that customer, correct?

It is time to fight back. You deserve so much better. Start doing smart things with your marketing budget!

Spilling Over

In my hobby (headphones), trouble caused in one area spills over into another area.

In other words, if you were looking for the very popular Fiio FT1 (which had already increased in price from $149 to $159), you better act now.

Also, since you are likely running a business, show your customers you are on their side. Headphones.com sent a text two days ago telling me that they were taking 20% off of expensive headphones (yesterday it was a rare flash sale) ... they shift the narrative in your favor. How you communicate over the next year goes a long way toward stopping the slop from spilling over into your business/customer relationship.

Finally - my goodness, how do you plan your business? You have no idea what your cost of goods will be. Unnecessary and capricious. Regardless, you have to plan your business, and some of you are going to do amazing work in upcoming months. You did it during COVID, you'll do it now. It's your turn to be a Leader, and we don't have enough Leaders right now. I'm going to be so proud of you!

Since You're Hunkering Down ...

Let's revisit something from three weeks ago.

Those of you who are cutting back on marketing spend will see a demand/sales shortfall, in all likelihood. Have you forecast what the shortfall will be? Do you have an idea how much "additional shortfall" could happen if prices increase?

Opportunity #1:  $4,990 for a high-level pricing impact study plus a five-year forecast of what happens if you cut back on marketing spend for the rest of the year. You'll see the short-term and long-term impact of your decisions, plus you'll get a clear idea of the impact of price increases on your brand.

Opportunity #2:  For my catalog audience, you're going to cut circulation by 30% and you'll likely not understand "what" impact that will have in the short/long term ... and worse, you may well choose to cut the "wrong" circulation. My typical catalog marketing project costs $30,000, where you get equations that tell you exactly how many times to mail customers on an annual basis.

• For $15,000, you get everything that happens in the $30,000 project except for the scoring equations. In this case, however, I'll send you a list of the customers you should cut back on, and in that list you'll see the customers you should never cut back on, so you can take action for the remainder of 2025. You'll make a ton of profit for just $15,000.

Let me know which opportunity you wish to pursue ... let's see if there are ways to mitigate the impact of the changes being thrust upon you. Contact me now (kevinh@minethatdata.com).

P.S.:  I don't know if you are fan of golf or not, but if you are, this song should soothe your soul during times of self-inflicted harm. It's a tradition unlike any other. Also - that song is written and recorded by Dave Loggins, brother of Kenny Loggins. It's smooth, smoother than Footloose or Danger Zone.