Quantifying the Effects Promotions Mania
It is Nov and that means over the next few weeks, shoppers will be bombarded with email newsletters and SMS push notifications about ongoing pre-sales and promotions.
This is the expected event line-up (depending on where you are based)
- Singles Day (11.11)
- Black Friday (23.11)
- Cyber Monday (26.11)
- X’mas Shopping (Whole of December)
This is significant because, for many e-commerce merchants, this season represents a significant chunk of your annual sales (sometimes up to 40%).
There are countless articles and posts online right now about the different tactics on how to engage shoppers such as
- “Be mobile friendly”
- “Build an Instagram audience”
- “Get celebrity endorsements”
- “Provide a personalised experience”
- “Start a holiday-themed blog”
With all the mania behind the tactics, marketers are rushing to get their collaterals out before the holiday season but one has to wonder… how much is all this worth?
Yes, I did suggest above that sales during holiday seasons represent a large percentage of annual revenues but aren’t you all curious about the ROI on the work that everyone is putting in?
When you start breaking it down, there are really two parts here…
- Marginal Uplift of Promotions
- Are these promotions worth it?
- What would the difference be if I ran a 10% promotion instead of a 20% promotion?
- Acquisition Cost and Lifetime Value of Shoppers
- Given all the upfront investment in engaging my current shopper base, how effective are these initiatives in retaining them?
- How does this new cohort of shoppers who are discovering my store for the first time differ from everyone else?
If you were willing to go through the hassle of content creation and selecting the right advertising channel for your promotions- shouldn’t it be logical to spend at least a couple of hours calculating how much these promotions are worth to you?
I promise you that if you have sufficient data, you can crack this out in under 30minutes- 15 minutes each.
# 1: Marginal Uplift of Promotions
Change in Sales due to Promotions =
Actual Sales – Baseline Sales + Effect of Complements and Substitutes – (Hoarding)
Ok, some definitions:
- Actual Sales: The sales collected over the promotional period given the new price
- Baseline Sales: Estimated sales assuming no promotion (old price)
- Effect of Complements and Substitutes: The net effect of shoppers switching away from possible substitutes and shoppers purchasing goods that go well together
- Hoarding: Some merchandise may be bought in bulk during discounts and consumed over a longer period (e.g. Detergent). This might not be applicable to everyone
In order to fulfil my promise of finishing this section in 10 minutes, we are going to ignore the effect of complements and substitutes and the hoarding effect because they tend to have less of an effect (mostly, not always).
The final step is to factor in the cost price.
Note: This is an overly simplistic example because it is common for suppliers to offer retailers a discount that you can pass onto your shoppers during the holiday season.
In this example, you might actually be making a “loss” as compared to simply not doing anything. This might seem like a terrible promotional initiative but it could pay-off in the long run. (hint: CAC)
# 2: Customer Acquisition Cost and Lifetime Value
Customer Acquisition Cost (CAC) is defined as the total cost required to acquire a new customer.
This should include everything from marketing and sales to the software used for drip marketing campaigns. For sake of simplicity, we will stick to this:
Lifetime Value (LTV) is defined as the sum of how much a customer will spend in his/her life with you. There are usually two ways to calculate this, either the historic approach or the predictive approach. Because there is a huge uncertainty in the estimation of future potential, we will favour the former for this example. (Also note- we will be using twelve months to be prudent)
It should be noted that CAC and LTV are not meant to be static calculations, these metrics change month to month and they should be examined based on cohorts.
Use the historical comparables of a similar promotional campaign in the past and check two things:
- Did this cohort of new customers last longer/shorter or the same length of time?
- Did they spend more over time?
- Do they cost more to acquire?
A good CAC:LTV ratio should be approximately 1:3, anything more and you can afford to spend a little more on marketing.
# 3: Bonus Analysis- Ad Budget
Advertisement channels get more expensive during the holiday seasons so factor that into your calculations to see how much you want to budget.
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