What’s Your Gateway Drug?
Let’s take a look today at Roger’s Photo Shoppe, where Roger sells all types of camera equipment and processing services. As Roger reviews his sales and profitability reports for the past year, he discovers that revenue and margins were exactly equal for both cameras and camera bags. Struck by the coincidence, he takes a look at the advertising and marketing budgets for the past year and sees that he spent essentially the same dollars promoting each of these product lines.
Clearly, he says, each of these product lines is of equal value for my business and each deserves an equal amount of promotional activity in the coming year. It’s a seemingly logical conclusion, but it’s probably 100% wrong.
Most likely, cameras are a much more important product line for Roger, because cameras are just the beginning. When customers come in to buy a camera, they’ll often buy an extra lens, a flash attachment, a tripod and, maybe, a camera bag. In fact, if Roger analyzes the transactions in depth, he might find that 40% of his camera bag sales were add-on purchases by camera buyers. He might also find that people who come in for a camera bag leave with a bag and little else.
Some products and services operate like gateway drugs, serving as the entry point for additional sales and long-term relationships. Other products or services might be profitable, but they stand alone as islands of revenue with no ripple effect. If cameras and camera bags produce similar revenue and gross margin, their value to Roger’s store can seem to be equal. If we recognize that cameras have a multiplier effect of 2.5 and camera bags have a multiplier effect of 1.1, we see that comparable data don’t reflect comparable impact.
What are the gateway drugs for your business? Which products and services represent the start of a growing, profitable relationship and which are dead ends? What could you be doing differently to maximize relationship growth in the coming year?
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Comments (1)
Love the article. Very informative.