Return On Investment When Business Is Good

If you're one of the lucky folks managing online or catalog marketing at a company that is "winning", you have an interesting opportunity.

Let's say that this profit and loss statement represented what you expected to happen in April.

Demand	$100,000
Net Sales	$85,000
Gross Margin	$42,500
Less Marketing Cost	$25,000
Less Fulfillment Expense	$10,200
Operating Profit	$7,300
% of Net Sales	8.6%
Ad to Sales Ratio	29.4%
Average Order Size	$85.00
Number of Purchasers	1,176
Cost Per Purchaser	$21.25
Profit Per Purchaser	$6.21

You expected to generate $7,300 profit, and 1,176 new customers.

You execute this marketing plan, and observe these actual results for the month of April:

Demand	$115,000
Net Sales	$97,750
Gross Margin	$48,875
Less Marketing Cost	$25,000
Less Fulfillment Expense	$11,730
Operating Profit	$12,145
% of Net Sales	12.4%
Ad to Sales Ratio	25.6%
Average Order Size	$85.00
Number of Purchasers	1,353
Cost Per Purchaser	$18.48
Profit Per Purchaser	$8.98

Courtesy of the magic of your merchandising team, customers loved what you offered them, spending 15% more than expected.

Here's the challenge. If you believe that during the month of May you will see similar results, you can pocket a similar level of sales and profit.

Or, you can increase your advertising, and acquire more names, while still generating the same level of profit you promised to your CFO. This example shows what could happen, if you boosted your advertising spend:

Demand	$143,635
Net Sales	$122,090
Gross Margin	$61,045
Less Marketing Cost	$39,000
Less Fulfillment Expense	$14,651
Operating Profit	$7,394
% of Net Sales	6.1%
Ad to Sales Ratio	31.9%
Average Order Size	$85.00
Number of Purchasers	1,690
Cost Per Purchaser	$23.08
Profit Per Purchaser	$4.38

This is one of those unique mysteries that complicate the lives of those of us who manage profit and loss statements for online or catalog channels.

Choice number one allows us to pocket an additional five thousand dollars of profit.

Choice number two allows us to achieve our budgeted profit, but grows the top-line by an additional $28,000, and adds an additional 337 customers that contribute to future sales and profit.

I've always advocated spending more money when times are good, and spending more money when times are bad (to liquidate merchandise, but not at liquidation prices) --- holding to the marketing budget when business is close to plan.

What would you do? Would you pocket the profit today, or, would you spend more to acquire more customers, customers that deliver future sales and profit? Your thoughts?

Virtual CEO: Blue Nile

Blue Nile, an online retailer of jewelry, has an interesting set of challenges to face in the future.

During a recent call with analysts to discuss third quarter results, management made several interesting observations.

• Ad spend as a percentage of revenue is four percent, and has held constant in spite of increases in the cost of online marketing.
• With brands moving online to advertise, management has decided to not compete by spending more on online advertising. Management states they lowered prices instead. The reduction in prices resulted in twenty-four percent increase in year-to-date net sales. However, gross profit only increased by eleven percent, due to price reductions. Gross profit is about twenty percent of net sales.
• Management is focusing on increasing conversion on the website, believing this is a key driver of future profitability. Management states that conversion rates are improving, compared with last year.
• Repeat purchasing skews toward non-engagement merchandise (which has better gross margins than engagement merchandise).

Time for you to play Virtual CEO. If online marketing costs are going to continue to increase, what would you do to grow your business?

• Follow the updraft in online marketing costs by spending more for the same amount of traffic.
• Lower prices, and accept the risk of a less-affluent audience. In other words, are you willing to trade your target audience for one that is less affluent, as a way of combating increased online marketing expenses?
• Do you have a different strategy you would employ?

Online pureplay retailers face the potential for long-term profitability decreases as the cost of online marketing increases. How would you strategically attack this problem? What marketing tactics would you employ to drive repeat business (which yields a higher gross profit)?