Let’s cut through some of the fear, uncertainty and doubt around the holiday shopping season and zero in on the true costs and benefits of this period.
“There’s no such thing as a free lunch.”
That’s the one piece of wisdom I retained from my senior year economics class in high school. Our teacher would say it at least once a week, and it’s true.
Unfortunately, the holiday shopping period in the US is often framed as the most important free lunch you’ll ever chow down on. Consumers are out there practically begging you to take their money. But, beware, it’s also the most competitive time of year. One wrong move and you could lose it all!
This is the classic hype -> fear -> uncertainty -> doubt narrative beloved by consultants everywhere. The holiday shopping period is important for many eCommerce businesses. So we owe it to ourselves to take a step back and take a cold hard look at what’s really going on.
Who Is The Holiday Shopper?
LTV:CAC is the rule of thumb that guides profitable eCommerce growth. LTV = lifetime value and CAC = cost of acquiring a customer. Essentially, you want to minimize your cost of acquisition and maximize the amount the customer spends with you.
But you also want to get as much of that spend up front (in the first three to six months) as possible. Because time is money (Common Thread Collective wrote a good deep dive here).
If you analyze your customer data, you’ll find that customers acquired during the holiday period–and specifically during the Black Friday/Cyber Monday weekend–will have the lowest six and 12 month LTVs of almost any acquisition period. These customers are less likely to return, and less likely to spend at full price when they do return.
I have run this analysis on multiple brands and it always plays out the same way. Go ahead and try it if you don’t believe me.
I outlined most of the underlying behaviors that drive this pattern here. High level: holiday shoppers almost always shop the brand at its most promotional, so they’re unlikely to shop when the goods are priced higher. And, depending on the brand, they may be shopping for someone else (buying gifts) with a completely different set of tastes and interests.
Both of these factors result in low-margin purchases and low repeat rates, also known as below-average Lifetime Value.
“Winning” BFCM: A Booby Prize
Ok, so holiday customers are less valuable than your average customer. But there sure are a lot of them! That should make up for it, right?
Well…maybe. The pundits are right: holiday is one of the most competitive shopping periods of the year. This means that paid media costs rise across the board starting in early November and typically reach their peak during the BFCM weekend itself.
To compensate for this, to stand out from competitors, and also because “it’s tradition”, brands and retailers will typically run some of their sharpest promotional offers of the year during this time.
You have two factors working to counter each other: higher average conversion rates due to deep promos plus consumer behavior vs higher media costs due to competition plus noise in the marketplace.
It’s up to you to determine how these factors weigh upon the scales of profitability in your unique situation. But analyzing Holiday through the lens of ROAS alone is a mistake.
The problem isn’t just that Holiday (usually) brings in sub-par customers at an elevated cost. The problem is that Holiday has come to dominate many brands’ time, energy and budgets at the expense of thinking more strategically about growth.
Holiday strategy sessions start in September and post-mortems sometimes run through February. That’s almost six months of mental energy dedicated to a 5-6 week period that, in most cases, doesn’t drive half the year’s revenue.
Another fun quote: “where attention goes, energy flows”.
Businesses that get hyper-focued on Holiday often find themselves doing the bulk of the brand’s customer acquisition during this period. This dilutes the customer file over time–it becomes full of low-quality customers, making it harder for the brand to sell anything at full price.
Worst-case scenario is that the brand forgets how to do acquisition altogether outside of promo-driven tentpole events. The retail bankruptcy graveyard is full of such cases.
So, What Should I Do Instead?
I’m not telling you to ignore the holiday shopping season or make any rash decisions. But I am telling you to think critically about the role Holiday plays in your business. Here are some steps you can take to “stop the insanity”:
- Determine how valuable holiday customers are for you compared to customers acquired during other periods during the year. Use the 6 month LTV analysis described earlier in the post.
- Do an audit of how much time your organization invests in holiday. What percent of your annual media budget do you spend during the period? How much time do you, your team members and your partners invest in holiday planning?
- Get real about gifting–is your brand or product something that makes sense as a gifting item (be honest)? This will reduce friction and put a little more weight in the “go all out for holiday” column.
Based on these steps, determine if you’re over-invested in holiday–both financially and emotionally. If so, start thinking of ways to simplify your holiday 2021 plans.
Can you shift some of the planned growth into other periods during the year? Can you order less inventory and run less aggressive promotions? Can you think of a creative marketing angle that doesn’t involve promotions, like REI shutting down their site for Black Friday?
Your long term goal should be diversifying your revenue and customer acquisition across the year, and ideally building your own tentpole selling event during a less competitive period. This is what Amazon did with Prime Day.
Breaking the addiction to BFCM is difficult but doable, and worth it.