Strategy What You Need to Know About Promotional Offers
By Stephen R. Lett
Promotional offers such as free shipping, 10 percent off, $5 off and a free gift can be extremely effective in boosting response and sales. But are you using promos correctly, or are you over-using them?
Many catalogers offer promotions to all customers and prospects. There's sometimes no objective behind the offer, other than to increase sales. What's more, offers are used without prior or proper testing — in fact, they're offered without any financial analysis at all. This month I'll focus on when and how to use promos — and whether you should use them at all.
Some marketers often feel pressured — often from management looking for more sales — to devise offers for the wrong reasons. Or they think they should offer a promo simply because a competitor does. It's important to your bottom line to use promotions strategically, for example to reactivate previous customers, acquire new ones, convert inquirers to buyers, or stimulate sales from your housefile during your slow season.
But why give away promotional dollars if you don't have to? Have a purpose for making offers. No doubt, your marketing toolbox must include promos from time to time. But continued, widespread use of promotional offers can negatively impact your bottom line. Here's why:
- Customers come to expect them. Repeated use of promos conditions customers to expect offers the next time they order, which can lessen the impact. For example, a customer may not feel motivated to buy now because she knows another offer will be right behind the current one. In a sense, we create promotion-driven buyers.
- The cost can have a negative impact. In certain customer segments, it's difficult to lift response enough to offset the added cost of giving the offer to everyone. Again, the more frequently you give offers, the less impact they have.
- Offers often are made without any testing. It's easy to set up an A/B or A/B/C split to test an offer, but most marketers simply don't do it. It feels like you're doing something positive by making the offer, so why test it? Still, test the offer that works against yet another offer to determine which one works best. And to validate results. Periodically retest what you think is a proven offer.
- Promos can negatively impact your next mailing. Some people order in advance of their normal buying cycle to take advantage of offers. When analyzing a promotion's results, look at the results of the mailing that follows, and then draw conclusions about the promo's effectiveness.
Let's focus on free-shipping offers. While some marketers say such offers have been overused, free shipping still ranks No. 1 in overall effectiveness. While I'm not building a case to use free shipping, I do want to question the use (or overuse) of this particular offer and set some recommended guidelines.
Who Qualifies for a Free-Shipping Offer?
The names you select to get the free-shipping offer should be in specific groups. For example, use the offer to reactivate 24-month-plus buyers, or to convert one-time buyers into multibuyers, or to convert catalog requestors. Don't, however, offer free shipping to your most recent buyers (unless you want to drive traffic to the Web). The chart "12-Month Free Shipping P&L" (below) illustrates the impact of free shipping on a zero-to-12-month housefile and the lift needed to fund the promotion.
12-Month Free Shipping P&L
Lost shipping revenue expressed as an adjustment to contribution
Control | Free Shipping | |
Circulation | 25,000 | 25,000 |
Orders | 1,250 | 1,563 |
Response rate | 5% | 6.25% |
AOV | $100 | $100 |
$/Book | $5 | $6.25 |
Demand | $125,000 | $156,250 |
Net sales (after returns/cancels) | $112,500 | $140,625 |
Gross margin | $56,250 | $70,312.50 |
Cost in the mail @ 70¢/book | $17,500 | $17,500 |
Contribution | $38,750 | $52,812.50 |
Net shipping revenue | ($14,062.50) | |
Adjusted Contribution | $38,750 $38,750 |
Note: Assumes lost shipping revenue at 10 percent of net sales. And assumes mail costs for the free shipping is the same as the control. But if there's a dot whack or wrap promoting free shipping, the mail cost must be adjusted accordingly.
The chart shows that you need a $1.25, or 25 percent, increase in the revenue per catalog (RPC) mailed, which is a reasonable expectation for a first-time, free shipping offer to a zero-to-12-month housefile. I've seen a first-time, free shipping offer increase the RPC by as much as 50 percent. You're thinking, "Wow! Let's offer free shipping to our 'best' customers." But keep in mind, repeated use of free shipping will condition customers to wait for the next offer. Moreover, results will decline due to overuse. And finally, use of a free-shipping offer can significantly impact your next mailing results, because the offer is generating demand early in the customer's buying cycle.
When to Make an Offer
Examine when offers are being made. Is it during peak holiday buying season when customers are buying, anyway? I even see offers made on cyber Monday! Offer timing is critical. It's just as important to know when to make the offer as it is to know when not to.
I've also noted the importance of testing an offer, a relatively easy thing to do. If you've been running a free-shipping offer all the time, test no offer or another offer. Don't assume the offer works. Test and re-test. And know how much you need to increase response rates and/or average order sizes to cost justify the offer. Following are 10 simple rules for effective use of offers:
1. Know why you're making the offer; that is, use the promo strategically.
2. Prepare a pro-forma; do your financial analysis.
3. Test the offer against another one.
4. Don't over-test offers within a drop.
5. Don't make the offer during your peak selling season, unless it's absolutely necessary,
6. Don't overuse an offer; re-test against a control or another offer.
7. Know what your competition is doing. You might have to use offers just to stay competitive.
8. Make sure your sample size gives you statistically valid results.
9. Expect some decline in the offer's impact over the control if the offer is repeated.
10. Read the results, and act on what you see.
Conclusion
Some catalogers resisted the temptation to make any offers this past holiday season, and they had great results. Many customers will order regardless of a promo, so you're giving away free shipping or discounting when you don't need to (this gets back to the point of having an objective for every promotional offer you make). Have a purpose in mind (e.g., to reactivate previous customers), and test each and every offer.
Stephen R. Lett is president of Lett Direct, a catalog consulting firm specializing in circulation planning, forecasting and analysis. He can be reached at (302) 537-0375 or via his Web site: www.lettdirect.com.
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