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.

Six Steps To A Well Executed Free Shipping Or %-Off Campaign

Read through each step, and ask yourself if your brand follows these steps.

Step 1: Always Execute A/B Tests. It's a good idea to make sure that some of your e-mail marketing list or catalog marketing list or paid search keyword campaign does not receive the promotion, and measure the performance of customers who receive the promotion vs. those who do not receive the promotion.

Step 2: Measure A/B Tests Long-Term. I cannot stress this enough. If you execute a free shipping test in November, re-visit the results of the test next May or June. Seriously. Measure the short-term impact and long-term impact. If you see a 20% lift in weeks 1-3 (the test period), and a -20% lift in weeks 4-26, you know that the promotion did not help your brand --- at all! Few folks actually execute this level of testing discipline. Those who do know secrets that the rest of us fail to understand.

Step 3: Quantify Incremental Orders And Flunked Orders. Incremental orders are those that were generated because of the promotion. Flunked orders are those that would have happened anyway, but now you gave away profit that lowers your bonus amount. If the test/control groups suggest that the promotion gave you a 20% increase in sales, while almost all of the orders happened with the key-code, then you know that 80% of the orders would have happened anyway. Flunked orders are bad --- they are orders where the customer believed in your brand, and would have spent hard-earned dollars that generate profit. We choose to flush that profit away. See Step 2 to understand if flunked orders generate long-term profit.

Step 4: Quantify "Staying Power". At Eddie Bauer, we measured the incremental value of the promotion by day. If the promotion lasted three weeks, we measured the lift by day. Those who execute this style of analysis know secrets about the staying power of tests that the rest of us simply make guesses about. Staying power is important, because if a promotion loses impact after a few days, you're required to constantly pull promotions off the board, then put them back up a few days/weeks later. And that isn't healthy for a brand --- it is like constantly hitting the gas pedal and then hitting the brakes while driving a car on the freeway. It means you are shifting power away from merchandise and to promotions. That's not a good thing --- you're in business to sell merchandise, not to sell promotions and gimmicks.

Step 5: Understand Who Utilizes Promotions. We don't do nearly enough of this, do we? Good analytics teams profile the customers who take advantage of promotions. Are they the best customers? Full price customers? Sale customers? Promotional customers? New customers? Lapsed customers? After profiling the audience, measure the long-term value of the customers utilizing promotions, comparing them to the customers who pay full price and pay for your bonus check.

Step 6: Understand Channel Dynamics. There's nothing wrong with executing promotions in e-mail campaigns and not in other advertising channels. But it is important to understand what this does to your business. Do the promotions cause e-mail subscribers to not buy from full-priced catalog marketing? If so, adjust the contact strategy accordingly, and realize that your e-mail marketing strategy lowers response in your catalog marketing channel (or vice versa). And seriously consider why your e-mail subscribers are more deserving of discounts and promotions than all other customers.

Poison Percentage

Ever wonder how you're really impacting your business with all of those free shipping and 20% off offers and bogos and whatever additional incentives you're offering the customer to buy merchandise?

One metric I've run for folks is called the "Poison Percentage" --- the percentage of volume, on a rolling twelve month basis that is generated because of a promotion.

I tend to stay away from item-level discounts, as those are influenced more by price elasticity and clearance activity --- those can be analyzed via a separate metric.

So the poison percentage focuses on free shipping, cheap shipping, percentage off an order, any promotion contrived by the marketing folks, any promotion that comes between the customer and the merchandise.

If that percentage is "high", maybe more than twenty percent of the total sales volume, then the business is being "poisoned", or so the theory goes. If you can drive enough volume and profit on discounted transactions --- and increase lifetime value in the process, then of course, you're not poisoning the business.

You'd run a profit and loss statement as follows:

Business With Discounts
	Clean Sales	Promotions	Tot.Company
Demand	$20,000,000	$10,000,000	$30,000,000
Net Sales	$16,000,000	$7,700,000	$23,700,000
Gross Margin	$8,800,000	$4,235,000	$13,035,000
Less Marketing Expense	$3,200,000	$1,309,000	$4,509,000
Less Discount Expense	$0	$1,200,000	$1,200,000
Less Pick/Pack/Ship Expense	$1,840,000	$885,500	$2,725,500
Varaible Profit	$3,760,000	$840,500	$4,600,500
Less SG&A Expense / Fixed Cost	$2,000,000	$1,000,000	$3,000,000
Earnings Before Taxes	$1,760,000	($159,500)	$1,600,500
Business Without Discounts
	Clean Sales	W/O Promos	Tot.Company
Demand	$20,000,000	$7,000,000	$27,000,000
Net Sales	$16,000,000	$5,390,000	$21,390,000
Gross Margin	$8,800,000	$2,964,500	$11,764,500
Less Marketing Expense	$3,200,000	$916,300	$4,116,300
Less Discount Expense	$0	$0	$0
Less Pick/Pack/Ship Expense	$1,840,000	$619,850	$2,459,850
Varaible Profit	$3,760,000	$1,428,350	$5,188,350
Less SG&A Expense / Fixed Cost	$2,000,000	$1,000,000	$3,000,000
Earnings Before Taxes	$1,760,000	$428,350	$2,188,350

You make assumptions about what would happen if you drop the discounts and promotions --- maybe within that audience, you lose 30% of your business, but you end up managing a smaller but more profitable business.

Are Discounts And Promotions Ruining E-Commerce?

A quick quiz: If we removed every one of the twenty boxes in the image (click on the image to enlarge it) and all of the potential permutations of the boxes in the image, what would happen to net sales, and earnings before taxes?

Discuss.

E-Mail Marketing Quiz: Full-Price Campaigns, Or Promotional Campaigns?

You are the e-mail Executive at a multichannel brand.

You run a series of tests, measuring how promotions work against an e-mail merchandising strategy offering customers compelling merchandise at full price.

At the end of your series of tests, here is what you learned:

No Promotions:

• % Of Delivered E-Mails With Clicks = 3%.
• % Of Clicks Converting To A Purchase = 2%.
• Purchasers Per 100,000 E-Mails Delivered = 60.
  
• Average Order Size = $100.
• Demand Per E-Mail = 0.03 * 0.02 * 100 = $0.06.
• Profit Per E-Mail = $0.018.

With Promotions (like 20% off your order of $100 or more):

• % Of Delivered E-Mails With Clicks = 5%.
• % Of Clicks Converting To A Purchase = 3.5%.
• Purchasers Per 100,000 E-Mails Delivered = 175.
  
• Average Order Size = $110.
• Demand Per E-Mail = 0.05 * 0.035 * 110 = $0.1925.
• Profit Per E-Mail = $0.026.

Clearly, customers respond to promotions.

Your Chief Merchant and Chief Marketing Officer do not want to make your business "promotional" in nature.

Promotions hurt the gross margin. Your Chief Merchant receives a healthy bonus if gross margin percentage is very high.

Your Chief Marketing Officer hates promotions, because she has been charged with growing a full-price brand.

Fortunately, the decision is yours. You are accountable for the e-mail marketing program, and you receive a healthy bonus if you grow e-mail demand, year-over-year.

Do you go with a low-response, full-price strategy? Or do you go with a promotional strategy that makes you look good, but fails to build partnerships with other executives? Do you "split the difference"?

What Is Wrong With E-Commerce?

We are more than a decade into the e-commerce experiment, and it feels to me like we've completely stagnated. Something is amiss with e-commerce.

Take a look at several leading websites:

• Electronics: Best Buy, Circuit City, Buy.com
• Apparel: J. Crew, Talbots, Coldwater Creek
• Home/Office: Staples, Office Depot, Office Max
• Housewares: Williams Sonoma, Restoration Hardware, Crate and Barrel
• Food: Omaha Steaks, Safeway.com, iGourmet.com

Within each category, I see similar presentation styles, similar merchandise, similar prices, similar promotions.

There is a human element of e-commerce that, to me, is simply missing. Retail merchandising is all about being human. People exhibit artistry and creativity in presenting and selling merchandise in a retail setting. People serve customers, solve problems, help select merchandise, help make the consumer feel good about her purchase. Humans fail, and we love to talk about all of the failures. But humans succeed far more often than not.

The catalog channel, to a lesser extent, has elements of human interaction. The catalog can be merchandised in a way that communicates a story to the customer. Imagery and copywriting communicates a story that engages the customer. The customer picks up the phone, and calls a person working in a call center. The human interaction between the person working in a call center is an important part of the historical success of cataloging.

I feel like the online channel is missing warmth, missing a certain element of humanity. All of the websites mentioned earlier do a nice job of presenting merchandise on their homepage. But in all cases, you are dealing with a machine. A machine (one usually programmed by humans) determines what recommendations it has for you. Navigation of the website is largely done in a drill-down manner, one built in the style of databases developed by information technology experts. You can use search and various hyperlinks to jump around a website. But for the most part, you are drilling down, then backing up to a landing page, then drilling down again.

This is not the human method of shopping used by customers in stores, or the random thumbing through pages of a catalog. It isn't natural. This drill-down and back-up style of navigation causes the merchant to not be able to tell a compelling story. Catalogers use copy to create emotion and inspire purchasing. The online merchant cannot do this, because the online merchant simply cannot know where every customer is going to navigate at any given time.

In the past two or three years, the pace of e-commerce innovation has slowed. E-Commerce continues to grow, in large part because customers are migrating from the catalog channel to the online channel, and because of the increase in access to broadband internet access. Once the transition from catalog to online wraps-up, and once the majority of consumers have broadband access, something will need to change in the online shopping experience.

I don't believe our industry's zealous focus on multichannel integration is the answer. Somehow, we marketers need to humanize the online experience. We need to move away from the "information technology" based design of websites, and somehow allow our customers to have meaningful experiences when visiting our sites. Until this happens, we simply compete on the basis of lowest price and best promotional tactics.