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I have two really bad habits: an interest in global politics and economics. Given the global economic downturn, there's been plenty to read about in both areas.

Recently, I've found an interesting subject in the debate over the 'Cash for Clunkers' program in the United States that has encouraged consumers to trade in their gas guzzling automobiles for more fuel efficient ones. Depending on who you listen to, 'Cash for Clunkers' is an example of Keynesian economics working wonders or it's a wasteful, inefficient government program whose true benefits are overestimated.

In the debate, skeptics frequently make an important point: 'Cash for Clunkers' is merely shifting future demand for new automobiles to today, not stimulating new demand. If one believes this to be a valid argument, which I do, the implication is obvious: the program isn't stimulating new auto sales, it's 'borrowing' them from the future.

While this point seems lost on many, the idea that demand can be both created and time-shifted is an important one to pay attention to if you run a business. In the context of a business, long-term sustainability generally requires the stimulation of demand for products and services, either from new customers or existing customers. Running a successful business, however, sometimes calls for the time-shifting of demand to meet immediate goals and manage cash flow.

Hypothetical example: you run a company that licenses a software product to customers. It should go without saying that you need to sell licenses to build a successful business. That means you have to acquire customers. Without customer acquisition, you're not going anywhere. Once you have a base of customers and have hit a plateau, taking your business to the next level will probably require that you develop new markets. You might do this by adding new products that your existing customers could benefit from or you might do this by finding a new market in which your product has an application. All of this falls under 'creating demand'.

Sometimes, however, creating demand isn't all there is to it. Perhaps, for instance, you have quarterly earnings estimates that need to be hit to secure an additional round of financing from an investor or perhaps you have bills coming due at the end of the month and cash flow is tight. Since you have a short-term need to bring in cash, trying to create new demand is probably not the most expedient approach. So you instead look to time-shift demand. This may entail offering a customer a discount on an early license renewal so that you can book revenue this quarter instead of next. Or it may entail giving an existing customer a sweetheart deal on a product it isn't already licensing.

In the final analysis, creating demand is all about growing and developing business; time-shifting demand is all about managing and choreographing the business you already have. For business owners, understanding that there's a difference and knowing when each should be employed is a crucial part of building a company that's sustainable over the long haul but that doesn't get lost navigating the short-term obstacles that almost all businesses eventually face.

Photo credit: MikeBlogs via Flickr.

Patricio Robles

Published 20 August, 2009 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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Comments (3)

Rob Mclaughlin

Rob Mclaughlin, VP, Digital Analytics at Barclays

Great post. This is a real challenge in ecommerce - if/when to offer a discount - total monthly revenue vs total quarterly etc...

I suppose it points towards the need for CRM based approaches to discounting.

It is a great concept to get your head around - knowing that someone will almost definitely buy so working to optimize their purchase date for your business :)

almost 7 years ago

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Benjy

I hadn't really thought of it like that before... but you're dead on.  This demand shift is exactyl what the auto makers needed, though, given the cash tied up in languishing inventory and other cash flow issues.  Better to sell tomorrow's cars today and see tomorrow than to wait for tomorrow's sale and be gone before the consumer shows up.  While the desperate situation of Detroit is one thing, how many other businesses hurt themselves in the long run by training customers to wait for sales/discounts before the end of a quarter, etc?  Demand shifts and average price drops, so they have to create more demand just to tread water. 

almost 7 years ago

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Jim Novo

Interactive business models are particularly prone to this demand shifting by their nature, and especially among best customers.  This will be "discovered" when the use of control groups becomes common in the testing of online Marketing programs (as it already is offline).

A good example is shopping cart recapture programs where discounts are offered.  The fact response rates are exceedingly high is not good; it just means most of these respondents would have bought anyway and the company is flushing future margin dollars down the pipe today.

Th sad thing is this borrowing from the future (often called subsidy cost in Marketing) is so easy to measure and twist to your financial benefit using a simple controlled test setup.  Exclude a random sample from the program, measure *incremental* response over this control group.

You find there is a "most profitable moment" to make such an offer, and it is certainly not when response rates are maximized, which the "faster the better" crowd touts as optimization of cart recapture programs.  Optimizing for response under this scenario simply maximizes margin erosion.

And I doubt that's what the senior folks in the company had in mind.

Sure, if you're coming up to the quarterly targets and want to drive Sales over Profits, by all means, go right ahead and subsidize best customers.  But know what you're doing and do it for a reason.

almost 7 years ago

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