Key Marketing Metric - Understanding The Difference Between Displacement And Dilution

Unwise Discounting Can Reduce Profits And Market Share

By David Miranda

Revenue optimization, once known as yield management, is relatively new to marketing. It was developed first in the travel industry. The premise is that perishable inventory (airline seats, hotel rooms, rental cars, cruises) is directly and dynamically correlated to key factors such as time, supply, and demand. It is the primary reason that the price of an airline ticket varies so dramatically among passengers on the same flight. Some passengers booked well in advance to get the best fare, while others who had to book at the last minute paid the highest price.

Of course, this is not an exact science, but a sophisticated "guessing game" by the airline, hotel, car rental firm, or cruise line. The process requires huge amounts of data to be "crunched" to determine the number of seats, rooms, etc. to be offered at any given price. When demand is low, more inventory is offered at lower prices and vice versa.

Revenue optimization has now made its way into other sectors, but caution should prevail. Many times business utilizing the practice displace or dilute revenues, so it's important to know the distinction.

Displacement refers to selling at a low price during periods of high demand. This unwisely "displaces" higher revenue to competitors after the company, who sold out its inventory at the low price, cannot meet additional demand. The result is that the competitor benefits from higher margins. Example: A company decides to offer a product at a highly discounted price and sells out. Unfulfilled demand is forced to competitors who charge more for the same product realizing higher profits.

Dilution refers to unnecessarily discounting prices to customers who either have already or would pay a higher price. Example: A company has already sold products at a higher price, but the product is moving slowly, so the company decides to sell remaining inventory at a lower price. Dilution occurs when the customers who already paid the higher price now demands the discount afforded others. The result - dilution.

The lesson is clear. A company must first analyze the potential effects of discounting - will it dilute revenue already realized or will it displace higher margin business to competitors?

Before considering discounting, do the math!

Revenue - Still The Only Way To Keep Score

The Only Statistic That Counts For Marketers Is Money

By David Miranda

A client, who had just been appointed the new senior marketing executive of a mid-sized company, asked me to attend an internal marketing meeting where the results of a recently completed marketing campaign would be presented. The meeting was scheduled for one hour including four presenters each representing a specific discipline. The first presenter, representing the interactive component, paged through an impressive powerpoint including various charts and graphs. As the last slide appeared, he summarized as follows:

"We generated a lot of eyeballs with this campaign, but we are disappointed with the number of impressions and although the click through rate is quite high considering the overall site traffic and limited number of page views; we are happy with the response rates that have contributed to our conversion rate exceeding our campaign targets. Any questions?"

All eyes focused on my client, their new boss. After a pregnant pause, he asked, "How much revenue did this initiative contribute to our fourth quarter results? Isn't that what's really important?" "Yes sir, it is, but I'm not sure I can answer that question.", was the response. No sooner had the boss asked his question, the other presenters quickly reviewed their own presentations in anticipation of the same question. They were right, although no one could answer to the boss' satisfaction. I could tell he wanted to make a point and he did. He concluded the meeting with sound advice, "we are here to make money and money is how we keep score. From now on, let me know what the score is."

In marketing, we have devised many performance metrics, particularly in recent years. There are the eyeballs, impressions, site traffic, unique visitors, and page views. Then there are the "rates", as in click through, click-to-call, conversion, response, and recall to name a few. Too many times, marketers like to demonstrate their professional acuity with lingo-laced jibberish. The only metric that counts, however, is revenue, money, moolah.

Straight talk must be the official language of the marketing department regardless of the individual specialty. Does the advertising, promotions, direct mail, or interactive initiatives contribute to the brand's revenue objectives? If so, how much? If not, why? Impressions, eyeballs, etc. are irrelevant if revenue targets are not achieved. If your hometown team played an important game, what is the first question you ask? Of course, "What was the score?" If the person you asked said "we completed 10 of 20 passes and rushed for 230 yards"; you would say, "who cares about passing and rushing, what was the score? Did we win or not?"

Revenue is the only statistic that matters in marketing. It's the only way to keep score on who wins and who loses.