Mix

In my recent newsletters about treating traffic as a budget for learning and testing, we’ve discussed traffic as something that’s largely outside of your control / an exogenous factor. It’s a convenient assumption, especially while reviewing test results. But while that’s mostly true, certain test results can actually challenge this, and open up more “budget” and traffic.

I was reminded of this earlier in the week when I met with a customer to review results from a price test. 

At a high level, the test in question was nearly a tie. The variant (a lower price on a best seller) produced a few cents extra of profit per visitor because of higher volume, but it wasn’t a massive win, and the confidence interval was wide - the groups were very close results. So you end up two cases, each with the same profit: (1) in which you have fewer units sold, a higher price, and higher unit margin % vs. (2) a case with more units sold, a lower price, and lower margin %.

If you run / work for a brand, I want you to quickly take a second about which one you’d prefer. 

…

Generally, we’ve seen two answers here:

For some direct-to-consumer brands, in this case of a profit tie, they want to solve for more of their product in the world - i.e., the lower price option. They believe that getting their product in more people’s hands will result in free marketing, more customers who can purchase a second time, and more future profits. 

For others, especially where wholesale is a larger part of the growth plan, they always want to opt for the higher unit margin % option (ie, higher price). This higher price gives them more freedom - they can maintain/command higher margins when they sell wholesale to their retail partners, and they can give bigger discounts when and if the need arrives. Meanwhile, selling fewer units may simplify their operational complexity.

Back to this brand I spoke to this week- in their tie, they were leaning towards the lower price and getting their product into more people’s hands. BUT they also saw an opportunity to use these lower prices to change their traffic mix.

As we dug into the test results, it turned out that the lower price point created significant improvements in profit per visitor for Meta traffic. These new Meta customers were massively favoring the lower price. 

Since they completely control their marketing mix / spend, they can take advantage of this finding by scaling up their Meta ad spend. With a higher profit-per-visitor from Meta traffic, they can afford to spend more to acquire a customer from Meta; by being willing to spend more to acquire a customer from Meta (ie, eating higher CAC and becoming less efficient), they can likely spend significantly more on that channel; by spending more on Meta, Meta will become a larger chunk of their audience mix; and all of the sudden, these results may look like less of a tie, since our best segment (Meta) is now taking up a larger chunk of the traffic. Following all that? 

In short, this brand decided to skip segmenting price per channel, and instead concluded that a potential path forward could be to roll out the lower price to all traffic and adjust its marketing mix to takes more advantage of a more profitable channel. It’s akin to an arbitrage-era DTC opportunity, because it found a better price to drive profitable demand.

This is an interesting approach, mostly because the budget framework I laid out previously treated traffic as outside the brand’s control. This, though, shows that traffic isn’t fully outside the brand’s control. And marketing mix is the main reason for that.

In fact, with a good testing program, it’s likely you can find levers to pull within your marketing mix to give you more control over traffic.