Promotional Offers... What You Need to Know

by Stephen Lett

Promotional offers such as free shipping, 10% off, $5.00 off, a free gift and more can be extremely effective when used properly. But, are you using promos correctly? And, are you over using them? Many catalogers are offering promos across the board to all customers and prospects. When this is done, there is really no objective behind the offer (other than to increase sales). What’s more, offers are being used without prior or proper testing. Promos are being offered without any financial analysis either. This month, we have focused on promotional offers; when and how to use offers and whether you should use them at all are important topics to consider.

We often feel pressured to make an offer for the wrong reasons. Pressure from management for more sales is one reason. Or, we might conclude that we should offer a promo simply because a competitor does. It is important to the bottom line to use promotions strategically either to reactivate “old” customers, to acquire new buyers or to convert inquiries to buyers. Or, offers can be used during your slow season as a way to stimulate the housefile. Why give away promotional dollars if you don’t have to! Have a purpose for making the offer. And, don’t over use them.

The marketing tool box needs to include promos. Absolutely! However, we also believe that continued wide spread use of promotional offers can negative impact the bottom line. Here are a few of the reasons why:

  • Customer Expectations – Repeated use of promotional offers conditions the customer to expect an offer the next time they order. This can lessen the impact of the offer. For example, the customer might not feel motivated to buy now knowing another offer will be right behind the current one. In a sense, we create promotional oriented buyers.
  • Cost Impact – To certain customer segments, it is difficult to lift response enough to offset the added cost of giving the offer to everyone. The more you give the offer, the less impact it will have.
  • Lack of Testing – Offers are being made without any testing. It is easy to set-up an A/B or A/B/C split to test an offer (or two) but we simply don’t do it. We feel we are doing something positive by making the offer so why test it! Test the offer that works against yet another offer to determine which offer works the best. And, re-test a proven offer from time-to-time to validate the results.
  • Next Mailing – Making a promotional offer can have a negative impact on the next mailing. People tend to order in advance of their normal buying cycle in order to take advantage of the offer. When analyzing the results of the promo it is always good to take a look at the results to the mailing that follows before drawing any conclusions.

Let’s focus on a free shipping offer. I am sure most of you would agree that this offer has been used a great deal. Some would say that it has been over used. Or has it? A free shipping offer still ranks number one in overall effectiveness. While we are not building a case to use free shipping, we simply want to question the use (or over use) of this offer and establish guidelines for using it.

 

WHO QUALIFIES FOR THE OFFER

 

Those selected to receive your offer should be in specific groups. For example, you might want to use the offer to reactive 24+ month old buyers. Or, you might use an offer to convert catalog requestors who you have not been able to convert and a couple or re-mails to them. We also like to use offers to convert one time buyers into two and more time customers. What we don’t like to do is make offers to our most recent customers (unless we want to drive traffic to the Web). The chart below illustrates the impact of offering free shipping to the 0-12 month buyer file and the lift needed to fund the promo.

12 Month Free Shipping P&L
Lett Direct, Inc.
2/2/2006
       
Lost shipping revenue expressed as an adjustment to contribution  
         
Sample Free Shipping P&L Control   Free Shipping  
Circulation 25,000   25,000  
Orders 1,250   1,563  
Response rate 5.00%   6.25%  
A/O $100.00   $100.00  
$/Book $5.00   $6.25  
Demand $125,000.00   $156,250.00  
Net Sales (after ret./cancels) $112,500.00   $140,625.00  
Gross Margin $56,250.00   $70,312.50  
Cost in the mail $.70/book $17,500.00   $17,500.00  
Contribution $38,750.00   $52,812.50  
         
Net Shipping Revenue     ($14,062.50)  
Adjusted Contribution $38,750.00   $38,750.00  
* Assumes lost shipping revenue at 10% of net sales.
* Assumes that the cost in the mail for the free shipping is the same
as the control.  However, if there is a dot or wrap promoting free shipping.

Our chart shows that we need a $1.25 or 25% increase in the RPC (Revenue per Catalog) mailing which is a reasonable expectation for a first time free shipping offer to the 0-12 month customer file. We have seen a free shipping offer when used the first time increase the RPC by as much as 50%. You are thinking, wow; let’s offer free shipping to our “best” customers. However, keep in mind that repeated use of a free shipping offer will condition your customer to wait for the next offer if you stop using it. Results will decline due to over using the offer too. And finally, the use of a free shipping offer can significantly impact the next mailing results because the offer is generating demand early in the customer’s buying cycle.  

 

WHEN TO MAKE AN OFFER

 

Many times, we question when offers are being made. We see lots of strong offers like free shipping being made during the peak holiday buying season when customers are frantic to buy anyway. We also see offers being made on cyber Monday! We feel the timing of the offer is critical. It is just as important to know when to make the offer and it is to know when not to.

 

TESTING THE OFFER

 

We have already pointed out the importance of testing an offer. It is a relative easy thing to do. If you have been running a free shipping offer all the time, test “no offer” or another offer. Don’t just assume that the offer works. Test and re-test.

 

THE ANALYSIS YOU NEED TO DO

 

Always do your homework. Know how much you need to increase the response rate and/or average order size in order to cost justify making the offer. Don’t use an offer blind.

 

OUR TEN SIMPLY RULES WHEN USING OFFERS

 

  • Know why you are making the offer. Use offers strategically.
  • Prepare a pro-forma; do your financial analysis.
  • Test the offer against another offer.
  • Don’t over test offers within a drop.
  • Don’t make the offer during peak season (if you don’t need to).
  • Don’t over use an offer; Re-test against a control or another offer.
  • Know what your competition is doing.  You might have to use offers just to stay competitive.
  • Make sure your sample size gives you statistically valid results.
  • Expect some decline in the impact of the offer over the control if the offer is repeated.
  • Read the results and act on what you see!

Some catalogers resisted the temptation to make any offer this past holiday season and had great results!  Keep in mind that many of your customers will order regardless of a promotional offer. Therefore, you are giving away free shipping or discounting when you do not need to do so (this gets back to the point of having an objective for every promo offer you make). Have a purpose in mind such as to reactivate old customers and be sure to test each and every offer you make to your customers and prospects. And test as you go!