Our Promotional Future

Sometimes we do things that cause customers to change behavior. In 2009, we might wonder why our customers don't seem to want to pay full-price for merchandise.

Here's what happens. Based on considerable customer analysis, we have a customer who like to buy full-price merchandise. Here's what this customer is expected to do, next year:

Normal Scenario	Full-Price	Discounts	Grand Totals
Demand	$50.00	$10.00	$60.00
Net Sales	$40.00	$8.00	$48.00
Gross Margin	$20.00	$4.00	$24.00
Less Mkt. Exp.	$7.00	$2.50	$9.50
Less Pick/Pack/Ship	$4.60	$0.92	$5.52
Variable Profit	$8.40	$0.58	$8.98
Profit % of Net Sales	21.0%	7.3%	18.7%

Notice that this customer has a reasonable chance of taking advantage of one of our many discount schemes (lower prices, free shipping, %-off offers). If the customer takes advantage of an offer of this nature, here's what next year's activity looks like:

Transition To Discounts	Full-Price	Discounts	Grand Totals
Demand	$25.00	$45.00	$70.00
Net Sales	$20.00	$36.00	$56.00
Gross Margin	$10.00	$18.00	$28.00
Less Mkt. Exp.	$5.00	$11.25	$16.25
Less Pick/Pack/Ship	$2.30	$4.14	$6.44
Variable Profit	$2.70	$2.61	$5.31
Profit % of Net Sales	13.5%	7.3%	9.5%

The customer is fundamentally different now. She actually spends more, $70 per year instead of $60 per year, but she's going to shop when you tickle her buying bone. And it costs money to tickle the buying bone of a loyal customer.

This style of analysis is essential in 2009. We need to see whether our thirst for clearning merchandise and "maintaining market share" in Fall 2008 have a detrimental impact on customer profitability in 2009.