Article

The 4 Horsemen of the Profit Apocolpyse

Advertising Consumer Behavior Data Ecommerce

June 17, 2024

Before diving into this week’s issue, I’ve had a flood of new subscribers over the past week (thanks, ConvertKit) – so, welcome! I’ve included links to the most popular newsletters below, as well as a link to the full archive:

Recently, I wrote about the major trends shaping marketing/advertising in 2024. The one that most people have asked about since: profit-taking. More specifically: where are brands unnecessarily incinerating profits?

1. Useless Discounts

As a starting point, I think most discounting strategies are short-sighted (and potentially illegal) at best, and self-sabotaging at worst. This isn’t just a financial point, it’s a psychological point: if you’re discounting your core products/services, you’re implicitly signaling to your core audience either (a) our product/service isn’t worth what we’re selling it for or (b) our margins are so high that we can afford to reduce the price.

From a business perspective, discounts should be a revenue acceleration and/or surplus spending capture mechanism, not a business-as-usual strategy. That means that discounts should motivate your audience to spend more + faster than normal (thereby giving you cash flow), or they should capture a larger share of externally-motivated spending surge (BFCM). That’s it. Those are the core use cases for a discount.

Before anyone gets hot and bothered, there are certainly instances when discounting is appropriate and potentially advisable: major purchasing moments (i.e. BFCM, holidays, etc.) and inventory-movement moments (i.e., end of season, clearance) are two examples that come to mind. The commonalities you’ll notice from these examples are: (1) they are time-delimited, (2) the discount is a major deviation from standard business and (3) there’s a reasonable justification in the customer’s mind as to why this is occurring (it’s BFCM, or they’re just getting rid of surplus inventory, or whatever).

When discounting goes beyond this, it quickly approaches “profit incineration” territory.

A few examples:

10% off discounts for signing up to an email list: I don’t know who did the math on this particular promotion, but they were bad. For the vast majority of brands, this just represents profit incineration. 10% off for an email has been making the rounds in DTC-world since (at least) 2013, and I’ve yet to see an incrementality test showing that the gain in customers acquired (i.e. customers who only purchased due to the discount) exceeded the cost of the discount to the brand. In most cases, 10% represents ~30% to 75% of the first-order contribution margin for the brand. Imagine giving that away on EVERY purchase, all for the right to email the person in the hope that they’ll buy again. What’s worse? Virtually every shopping parasite (Honey, Capital One Shopping, ShopSavvy, RetailMeNot, etc.) stores those 10% off codes, so users don’t even have to give you their email to realize the discount.

The end result: the 10% off gets applied to virtually every order, your email list capture declines, and your brand ends up in a position where more than 10% of your contribution margin (likely 30-75%) is incinerated by a discount code. The only difference between this and lighting dollar bills on fire is that, if you burned the money yourself, it’d keep you warm and entertained for a minute.

The only way a 10% off for an email promotion makes mathematical sense is if: (1) it’s a one-time-use code, (2) you’ve run an incrementality test that demonstrates the 10% off (or whatever) provides a net contribution margin gain across your entire user base*, and (3) you’ve tested alternatives to the 10% off, and found that this offer type performs best.

To be blunt, most brands could scrap the 10% off (or whatever), replace it with a different value-add (content download, lookbook, quiz, free gift with purchase, etc) and achieve the same conversion rate and AoV, all while increasing their total contribution dollars by anywhere from 20% to 50%. If you’re curious about discount alternatives, I wrote about those here.
Perpetual Discounts: the only thing worse than dumb discounts (like the above) are perpetual discounts. These are the constantly-rotating discounts that (generally) offer the same type of benefit (home services companies, travel/tourism brands, even UberEats all offer various forms of these), stated in slightly different terms. Not only are these increasingly illegal (and yes, there have been many cases where courts have penalized brands for doing this), they’re woefully ineffective.

The net-net of perpetual discounts is twofold: (1) customers “reprice” the brand to always factor in the discount and (2) customers expect the discount and wait for it – making it virtually impossible to convert at MSRP. In a very real sense, perpetual discounts result in your customers being addicted to that discount, to the point where they won’t purchase without it. Long-term, that’s an immensely difficult position for the vast majority of brands to maintain (and yes, there are exceptions – but if your strategy hinges on your brand somehow performing at the same level as an established, legacy brand, well good luck with that).

If you find yourself in the perpetual discount cycle, there are two ways to break free: (1) cold turkey and (2) the lever-and-ratchet method. Neither is pleasant, one is necessary. Cold Turkey is exactly what it sounds like: we stop discounting. Make it an event, acknowledge that you’ve discounted too much for too long, and clearly communicate your new pricing strategy moving forward. Bonus points if you frame it in terms of benefit to the consumers (“Our overriding priority is to do right by our customers, our team members and our communities. The simple fact is that living up to that commitment requires us to price our products and services fairly and consistently….”).

The alternative is the lever-and-ratchet model, where you (a) lever up the price while (b) ratcheting down the discount. This creates margin for your business, while forcing customers to do a lot of math if they want to understand the increase. The levering can easily be done under the guise of inflationary pressures or (if appropriate) increased costs to make things in America/pay living wages. The ratcheting down of the discounts should follow the levering, and be smaller – so if your Business-as-Usual (“BAU”) discount was buy 2 get 1 free, ratchet this to “Buy 3, Get 1 Free” or “Buy 5, Get 2 Free”). The benefit of this is that you’re driving HIGHER minimum volume (buy 3 or 5 vs. 2), while offering a lower discount (33% or 40%, vs. 50%). Rinse & repeat a few times over a year or two, and you’ll be in a place where you can seamlessly transition to a “consistent fair price”.

Either method can be paired with “transition” pricing for new products, services or offerings – limited-edition drops, making discounts not apply to new products/services, etc.

Whatever method you take, it won’t be easy, simple or painless. You’re likely to see lower sales in the immediate aftermath, as well as more customers/clients complaining/asking for the old discounts. There will be a real temptation/pressure to capitulate to these requests. Don’t. Breaking free of a perpetual discount requirement will make your business that much healthier and more profitable in the long-run.

2. Loyalty Programs

Fundamentally, loyalty programs are just like every other incentive – when they’re properly aligned, they’re magical. When they’re poorly aligned, they’re a disaster. In the case of loyalty program, the misalignment happens on two axes:

The behavior: the most common forms of loyalty programs are either (a) purchase-based (“buy 10 ice creams, get 1 free”) or (b) spend-based (“spend $100, get $10 back”). In both cases, the customer already buys your product habitually at full price – so, what’s the behavior you’re trying to train? It isn’t triggering a first purchase (no-one buys an ice cream or spends $20 today, thinking that if they then go forward to buy 9 more (or spend $80 more) in the future, they’ll get a mediocre reward). It isn’t spending more or trying a new product/service (at least directly). The only thing these types of loyalty programs achieve is reducing margin on something you’ve already succeeded in convincing the customer to buy with regularity.
The benefit: if someone has already purchased multiple times from your brand at regular price (product, service, whatever), they clearly understand the value of your product/service. Why cheapen it? What’s even worse? Most people don’t even understand how these programs work – 90%+ of loyalty programs are too complex and too convoluted to even be a factor in people’s decision-making.

If you must have a loyalty program, create one that drives additional value for your brand without undermining profitability or perceived value in the mind of your most loyal customers.

Luxury brands have mastered this. When I was last looking to purchase a car, I visited a Porsche dealership with a Taycan in stock. When I asked to test drive it, the response I received from the associate was an eye-opener: to even be considered, I first need to buy a Macan or a Cayenne – maybe two. That’s nothing compared to Hermes. Last week, I was speaking with a friend and former client who runs a luxury fashion boutique. She said that the current spend threshold to be considered for a Birkin invitation (i.e. the ability to purchase a Birkin) was over $100,000 from a single sales associate in a year. If you don’t believe that, check out this lawsuit filed in CA accusing Hermes of antitrust violations.

While not all brands are Hermes or Porsche, there’s a lesson here: use loyalty programs to offer benefits/values that no-one else can get and that don’t hurt your underlying business or cheapen your brand.

So, while you might not be able to demand that customers spend $100,000 in the next year just for the opportunity to maybe purchase a Birkin, you can build a loyalty program around elements like:

Exclusive access to events or new/limited run products
Concierge service (Nordstrom has mastered this)
Trials of tangential/adjacent products/services (GNC is great at this)
Upgrades or premium services (i.e. automatically upgrade your VIPs from a “basic” to an “advanced” package when they make another purchase).
Random “just because” rewards to try new products/services

The best part?

Each one of these functions as a way to properly align incentives, while driving your best + most loyal customers to expand their relationship with your organization in a way they haven’t before.

Bonus points if you: (a) tie different rewards to different activities (i.e. in order to be eligible for the VIP [event], you have to refer three customers to us or do X.; in order to get early access to the new product drop, you must first do Y.) and/or (b) use dynamic criteria (like top X% of customers) in order to continually ratchet up the requirements to participate.

And the cherry on top of this delicious profit sundae?

This kind of loyalty program is LESS EXPENSIVE to run. You save money on the actual program administration, MAKE MORE because you’re not discounting stuff people are already buying and INCREASE Customer Value by providing a mechanism for customers to try products/services they haven’t used before.

Oh, and this type of loyalty program manufactures exclusivity and demand – people are competitive. People are envious. This program plays into both of those tendencies.

3. Lead Follow-Up

While the first two profit incinerators focused on direct margin destruction, this one is a bit more subtle.

Speed kills. It’s true in professional sports, and it’s true in business.

After doing dozens of audits for B2C and B2B lead-gen brands, there’s one data point that has always been consistent: lead value decays exponentially. Every minute that a lead sits in an inbox or CRM untouched and un-responded to, the value of that lead goes down. The more competitive the industry, impulsive the purchase or non-differentiated the offering, the steeper the decline.

I’ve reviewed hundreds of ad accounts with excellent conversion/lead metrics, only to hear from the client that the leads just weren’t good or relevant or converting. It was only after I dug into the CRM that I found the issue: the lead follow-up was non-existent – all because of a malicious cycle:

Sales person was given an initial sheet of web leads, called, no dice.
Because of this initial experience, the salesperson believes website leads are lower value.
Salesperson prioritizes other leads over the website leads, leading to longer callback periods for website leads vs. other leads (referrals, etc.)
Therefore, when the salesperson calls web leads, they are less likely to convert, reinforcing the initial perception.

The most egregious example of this was a law firm I worked with years ago. We were generating leads for a major matter (The USC/George Tyndall case). Over the period of about a week, we brought in ~50 qualified leads. We were completely shocked to hear on our month-end call that not a single case had been signed as a result – so we dug in.

As it turned out, the intake attorney responsible for calling each lead had been on vacation, but declined to tell anyone or re-route the workflow so that other associates would be able to follow up with the leads in a timely manner. When the intake attorney returned to work and called each lead, most had already hired another firm. A few weren’t qualified, and a few more were probably just exhausted from having their phone blown up.

Result: no cases.

It gets better: about a year later, the list of plaintiffs who had signed on to one of the Tyndall cases (there were a few) was public – and we could see that many of the leads from this initial ~50 were on the list. While that was little consolation for this law firm, it does illustrate the broader point wonderfully: lead values decline precipitously.

In working with organizations, it’s clear many academically understand this reality, but few have internalized it. After all, what’s the difference in 10 minutes? 20 minutes? An hour? A day?

The answer will probably surprise you.

According to Drift (a Salesforce Lead Management company), the odds of qualifying an inbound lead drop by 78% after 5 minutes, and 90% within 1 day.

To put that in concrete terms:

If you work in an industry with a 35% qualification rate (pretty standard for home services, senior care, real estate, car sales), with a cost per lead of $100, a 33% close rate on qualified lead and an expected value of $10,000:

<5 Minute Response:
100 Leads
35 Qualified
12 Closed/Won
$120,000 Revenue
$10,000 Cost
12:1 Revenue:Cost
12% Lead-To-Close Rate

1 Day Response:
100 Leads
4 Qualified
2 Closed/Won
$20,000 Revenue
$10,000 Cost
2:1 Revenue:Cost
2% Lead To Close Rate

Yikes. On. Bikes.

This single failure – not responding in a timely manner – incinerated $100,000 in potential value. That’s likely more than the payroll for the entire sales team for a month. And that’s just the direct impact.

There’s also the indirect impact: lower CPL targets (since the “slow” leads convert to customers at a rate that’s ~83% lower than the “fast” response, a brand with a slow sales team can’t afford to pay $100 per lead – maybe they can only afford to pay $50. That further diminishes the pool of available leads, which siphons even more resources/sales from the company.

Here’s the kicker: most consumers (~55%) cite fast response or first response in why they ultimately purchased – a figure which increases in industries that are impulsive/urgent, complex, convoluted or perceived by customers as a commodity (think: lawn care, pest control, windows/doors, roofers, dentists, accountants, etc.).

Bottom line: if you’re in an industry that relies on leads as part of your new business strategy, it is imperative that you have a system in place to respond to every inquiry within 5 minutes. Not 10. Not an hour. Not a day. 5 minutes.

We’ve tested this as part of audits for clients, and only about 1-in-10 companies achieve this (it’s higher in SaaS, Car Sales & Real Estate, lower in other industries + LOL in most trades/homes services). But without fail, the companies that achieve this see dramatically higher close rates on leads.

The only other factor even REMOTELY as impactful as speed to lead is touchpoint volume: the goal should be to attempt contact at least 7 times within 1 week of a lead being submitted, preferably 4 times across all mediums (phone, text, email) within 48 hours.

I’ve heard salesteams say, “Well, if they’re really interested, they’ll call me back.” No. They won’t. This isn’t just me saying it, it’s data saying it. In every data set that I’ve seen, less than 10% of voicemails left by a salesperson result in a callback. If you believe InsideSales.com, the average is about 4.8% and falling. So, given that your odds of getting a call-back on any single voicemail are approximately 1-in-20, there are two choices: (1) be content with a 95% failure rate or (2) proactively call/text/email your prospects multiple times to manufacture more opportunities for them to either (i) answer directly or (ii) respond to the voicemail.

Before you ask:

Yes, some of this can be automated
No, the “thank you” message on your site doesn’t count as a response
Yes, calling is best. Texting is 2nd. Emailing is 3rd.
When in doubt, do all 3

4. Customer Service + Refunds

Costco does many things brilliantly well – but perhaps the one that is most ingenious is their absolutely-no-questions-asked return policy. It’s marvelous. I recently purchased two tents (the patio kind, not the campaign kind – hotels were invented for a reason). When we were putting one up, the handle thingy (technical term, I know) snapped and the whole thing came crashing down. I took the now-destroyed tent to Costco, carried it over to the return desk, and they gave me my money back in less than 2 minutes.

No questions. No forms. No shipping labels or craziness.

The person in front of me in line returned some steaks that didn’t “look right” – also, no questions. Just accepted the return, gave the person her money back, and on to the next.

Not only was this wonderfully efficient, it also makes good business sense:

Minimizes negative reviews – in every data set we’ve reviewed and in every study I’ve read on the subject, negative reviews are inversely correlated with conversion rates: the lower the reviews, the lower the conversion rate. Where things get interesting is when you actually speak to the people who leave negative product/service reviews (in particular): most aren’t driven by the actual thing that went wrong (broken product, incomplete service, whatever) – they’re driven by the follow-on experience where the initial issue wasn’t addressed. If a negative review impacts conversion rate by 0.1% (so 2.0% to 2.1%), you get 10,000 visitors to that page a month, and your Contribution Margin/Order is $100, that single negative review could cost $1,000 each month.

Sure, you “saved” money by not refunding/replacing the defective item due to your stupid return policy, but that negative review cost you 10x more than you “saved”. Congratulations on tripping over a dollar to pick up a dime.
Encourages Repeat Purchases: This one is also counter-intuitive, but – especially for retailers – refunding a customer actually increases the customer’s likelihood of immediately shopping in your store again. This makes sense from the perspective of the customer – the refund is “found” money, and we all know that people don’t value found things as much as paid-for things (the endowment effect).

Wastes Time + Energy: The miraculous thing about Costco’s return line is how quickly it moves – when there’s no negotiation, no haggling, no upset people screaming about whatever and asking to speak to a manager, everything just works faster. From a business standpoint, that means fewer associates are needed to manage this service (read: lower staffing costs), less real estate is required to provide the service (read: lower real estate costs / less non-sales space), and there’s less time for people to get in their feelings about the return (i.e., a more pleasant experience for everyone involved, no screaming and no people asking to speak to a manager). Everyone wins.

I’m not saying every brand should adopt Costco’s approach. But what I am saying is that there’s a clear correlation between brands with convoluted, complex, stupid return policies and brands that are forced to spend way too much time, money and energy dealing with negative reviews, unhappy customers and other miscellaneous nonsense. In the end, whether you’re a product or service brand, it’s almost always cheaper and better to issue a refund, replace the product or make the service right than it is to fight with a customer.

Bonus: SaaS Overload

When I originally wrote this issue, there were only four profit incinerators – but then I spent way too much time evaluating a pair of deals that came our way for our venture fund, and decided to add a fifth: SaaS overload.

As I was reviewing the financials and bank statements for one potential investment, I discovered they had 65 active (!!!), non-product (i.e. not related to their core offering, not cloud storage or compute, not security/compliance, etc.) SaaS subscriptions. Sixty-five. Total monthly burn on non-core SaaS was ~$20,000. That’s a quarter million dollars a year, for an “A” series startup with <$5M in revenue. That’s insane.

Making matters worse was the fact that many of these were redundant – HubSpot, ActiveDemand, MailChimp and SendGrid? Figma, Adobe and Canva? GSuite Pro, Slack and Zoom? Sprout and Later.com? The list goes on and on. Ultimately, I found that about 45% of these subscriptions could be canceled or consolidated with little-to-no impact on workflow or business operations. In real dollar terms, that translated to about $9,400 per month in savings, or about another free month of runway.

While this may seem like an outlier, the reality is that it isn’t: the average company has between 50 (small businesses) and 500 (large and enterprise organizations) active SaaS subscriptions at any given time. Some of these (cloud compute, website hosting, domain rental) are necessary, but many are not. More than half (53%) of all corporate SaaS licenses are unused. In just about any company, this represents hundreds of thousands – if not millions – in profit being incinerated each year.

Since this newsletter is already in excess of 3,500 words, I’ll keep this short: SaaS overload is out of control. We experience the same challenge at our agency, too: everyone wants to try new tools, freemium + free trials make keeping track of what’s in demo, what’s currently in use and what can be cut complex, and there’s not really an easy solution to this.

Here’s what we do to keep it in control:

Every 6 months, we audit every single subscription.
We’re in the process of consolidating all subscriptions onto a single credit card (not a single credit card providers, a single card) – this gives us more transparency into where subscription dollars are going
Cancel + replace all cards every 6-12 months – if you can cancel a card/service and no-one notices, well…you just saved a boatload of money.

Just about every organization would benefit from reviewing their SaaS subscriptions and asking tough questions about their use. This is one of the quickest wins you can get in business today – the return on the 8-10 hours required to itemize each subscription, identify its use case, and determine if it is worthwhile is often $100,000 or more. That’s $10,000+ an hour.

Happy Profiting!

Until next time,

-Sam

Related Insights