The Online CMO by Philip Hallenborg

When designing promos in your business there are an infinite number of options. The standard considerations are balancing units, margins and average revenue per order in your chosen area of incentive. The tools to do this are many. This article will address one of these tools namely what I call “thresholding”. By thresholding I mean setting a monetary threshold as a requirement for a reward expressed as a rebate %, dollar amount or complimentary product or service e.g. buy for more than $1000 and you get 20% off.

The key driver of a thresholding play is to shift the mean of your average order value to the right on your distribution bell curve. And the success criteria is that the cumulative dollar cost of promo (e.g. 20% rebate off $1000 = $200 x the units at or above cut off) in your sample scenario is lower than the incremental margin$ of the orders that will be up-sold from below the cut off, to at or above the cut off.

Simply speaking if the incremental margin$ from the anticipated up-sells > the $ cost of the promo for those normally purchasing at or above this level. See example below for a very limited sample size:

TRU = Total Revenue per Unit ~average order value, Systems = computer

The above histogram is a very useful tool of estimating the cost of a threshold up-sell offer. By bucketing historical orders in average order value buckets, you should discover a normal distribution. From this you can build scenarios around thresholds and simply calculate the margin cost vs. your estimated upsold units to the threshold. This is not exact science but will provide with the rigour you need to prove to your management that you have made some sound assumptions and assessed the risks involved.

Good hunting!