The meeting began with the marketing director explaining the company's new strategy. "We've reduced our mail plan by 20%. It will save us $132,000 in marketing costs. We did this by dropping the people who only buy sale items. We found that they were costing us $23 per year in marketing expense, but only generating $14 in gross profit so we are reducing costs and eliminating a segment that loses money."
After the congratulatory comments subsided, I asked, "What is your new inventory liquidation strategy?"
The people around the table looked at me as if I'd accidentally wandered into the meeting and didn't have a clue why I was there. The marketing director snipped, "This is a marketing meeting. We aren't here to discuss inventory management."
"Okay. Fair enough. But, what happens to the bottom line when inventory liquidation shifts from a profit center to a loss? Wouldn't it be better to mail smarter than not at all? Are you prepared to answer the 'what happened to our customers who bought the sale items?' questions from the C-Suite?"
Discount customers are less valuable when compared to other segments because the items they purchase have a lower margin.
Some may even be below cost. If your marketing strategy doesn't have a plan for these special customers, you're wasting money. But, with a little analysis and planning, they can be a profitable group for both marketing and inventory management.
Projecting inventory requirements is a balancing act. Order too little and customers are unhappy because you are in a backorder position. Order too many and you're left with dollars collecting dust in your warehouse. It is impossible to purchase exactly what you need when you need it to fill your orders. If you have a top-notch inventory management team, you'll have a 5% - 15% variance. Most companies don't have that luxury and end up with a 15% - 25% fluctuation.
Your discount customers are extremely valuable.
They buy your over-stocks so you don't have to sell them to a liquidator for pennies on the dollar. And, if you plan your marketing strategy well, they'll be a profitable segment.
The first step is to identify them correctly. Discount customers purchase on a regular basis, but they only buy sale items. Once you know who they are, plan your marketing strategy around the times they are most likely to buy. Some will buy every time there is a sale. Others will make seasonal purchases. They should receive sales promotions on a regular basis and the occasional full price mail piece. A review of purchases, costs, and margins helps to find the best marketing strategy. Using economical marketing tools, like email, are effective for these customers because they get the message without requiring a heavy investment.
One of the biggest challenges with managing discount customers is accurately measuring the costs. Marketing effectiveness is often measured by revenue less marketing expense less cost of goods. This works well for customer segments where people are purchasing full price items. It is misleading for discount customers because it only shows part of the picture. You have to look at what happens if those customers go away. When we ran the numbers for the company in the example, we found that the $132,000 saved in marketing dollars was offset by a $179,000 liquidation cost for a loss of $47,000. It's important to know how everything works together before you make major changes.
Related posts:
- Customer Life Cycle Part 3: How to Keep Newbie Customers from Eating Your Profits
- Customer Life Cycle Part 4: How to Identify Hit & Run Customers Before They Kill Your Business
- Customer Life Cycle Part 1: Your Customers are Changing - Does Your Marketing Still Fit?