The short-term results — in terms of sales and profit — of a particular advertisement or promotion can be completely misleading. A promotion that seems to perform well early on might spell future disaster for the business. Similarly, promotions that "lose money" might be goldmines in disguise. It all boils down to evaluating the tail end of the promotion rather than focusing on the head (the latter being all too often the case). Let's say you run an ad a popular product dropping your regular price by 20%. This deal is lower than any of your competitors and, despite the huge discount, is slightly profitable. Two months later you find that ad generated nearly 4x as many orders as previous ones. And it even generated 8% more gross profit despite the significantly lower margin. "It's just a numbers game and this ad performed better," right? Wrong. Not these numbers, anyway. One must take the long-term view, i.e. the promotion's "tail" into account. Imagine that, 18 months later, the following was observed about customers who had been acquired by this promotion:
- They reordered only 1.2x on average compared to 3.4x for existing customers;
- Their future sales and profit were on average 46% and 57% lower, respectively, than for ads run previously at the regular price;
- Veteran customers who responded to the ad subsequently reordered at an 18% lower rate than their cohorts.
In short, the new ad attracted lower quality customers who — on average — ordered much less frequently and spent far less money than existing ones. The result? The CLV of this new group of discount-acquired customers was dramatically lower than previous ones acquired at the normal/higher price point. Just as bad, existing customers who responded to the promotion were "tainted" by the experience and became less valuable buyers afterwards. This seemingly positive promotion turns out to have negatively impacted the health of the business. Unfortunately, such long term effects are (i) frequently overlooked, and (ii) often lead to poor strategic decision making resulting in lower sales and profit in the future. Difficult though these factors may be to measure, it's essential to make your assessments based upon the long view, not the short one. So, when you're evaluating promotions be sure to think tail — not head. // lm
August 23rd, 2007 at 6:57 am
Lloyd,
Your point is well taken (that you have to look at the back-end), but in the example you give, the discounted offer is still better. Assume your control would have yielded 100 customers worth $100; then your discounted promotion would have yielded 400 customers worth $43 (i.e., 57% less). That’s a total value of $17,200 (400 x $43) for the discounted promotion vs. $10,000 (100 x $100) for the control. Which amount would you prefer in your bank account?
Of course, you could change your assumptions to yield a different result. Either way, it comes down to the same thing: you have to run the numbers.
March 8th, 2008 at 8:19 am
Dave,
Thanks for pointing out that my figures were misleading (or, more to the point … that I failed to qualify them properly). Looking back at the post now, I don’t think I could obfuscated the matter any worse :-(. What I said:
Two words were conspicuously (and fatally missing), and I would have to come to precisely the same conclusion as you in this case. What I should have said was:
In short, the future value of the ‘via discount acquired’ customer segment proved to be many-fold less than their normally priced counterparts. Not only did they order less frequently, when they did purchase their average order size (and profit) was significantly lower, too. It was also pointed out that repeat customers who responded to the discount promotion subsequently reordered at an 18% lower rate than those who did not.
// To avoid any further confusion I’ve edited the original post. Thanks again Dave!