👋 Hey, it’s Sundar! Welcome to experiMENTAL where I share B2C startup marketing frameworks, how-to guides, and stories from 5 years of early Marketing at Uber and 10+ years at B2Cs.

In this week’s newsletter, you’ll learn:

• The preparation that goes into Black Friday

• Why the costs of Black Friday outweigh the benefits

Thanksgiving is my favorite holiday of the year. It’s an amazing combination of family, friends, and food (plus football for those that watch). It’s also the best representation of why I love America: gluttony, over indulgence, and polarizing political discussions. What a beautiful day. No seriously. It’s my favorite.

Every year as we carve the turkey, I can’t help but think about the poor brands that wait for Black Friday and how they’re just like the turkeys on the plate. They’ve been raised for slaughter just so advertisers and customers can feast and celebrate.

Below, we’ll explore the Black Friday/Cyber Monday (BFCM) journey from the perspective of a company planning around the 4 day weekend and why it’s not worth it.

The E-commerce cost structure

First, let’s step back into our favorite college class: Accounting 101. The cost structure of an E-commerce is one of the most unforgiving of business models, but it’s an important one to understand as to why BFCM is a money pit for companies.

Revenue: Product + Shipping revenue

Revenue a company generates based on what they charge the customer for products + shipping. This incorporates discounts and any other promotions.

Cost of Goods Sold (COGS): Cost of the product

Cost to make or buy the product that a company sells. Think of a T-Shirt that costs $5 to make and sells for $30. The $5 is the COGS.

Delivering costs: Shipping + Processing + Customer support

Cost of delivering the product including shipping costs, transaction costs (Stripe ain’t free), and costs to man a customer support team.

Marketing costs

The cost of advertising. This doesn’t account for Marketing staff costs.

Net profit: Revenue - COGS - Delivering costs - Marketing costs

The best ecomm companies have a net profit margin at 20% with the average at 10-15%. This means that for every $100 a company sells, they have $15 to spend on staff costs and other corporate expenses.

BFCM impacts every one of these line items.

The Black Friday journey

For many retail companies, BFCM is the biggest weekend of the year and represents a very large chunk of their revenue, profits, and mindshare. The weekend of, teams will stare at dashboards 24/7 and slack channels are pure chaos. It’s actually quite fun.

Planning for the day starts 2-3 months before with 3 phases, which can be simplified to “Months before”, “Day of”, and “Week after”.

As we’ll explore, each phase results in additional cost that Brands likely sweep under as they see their one day “profits” skyrocket.

Months before

To be top of mind and competitive, brands begin advertising for BFCM 8-10 weeks ahead of time. The goal is to begin communicating the deals they’ll have and try to get an early lead on share of mind and wallet. The one catch?

It’s expensive AF to advertise. The cost per 1000 impressions (CPMs) skyrockets 🚀 as Brands flood the ad market and drive up prices.

This chart is 4 years old, but it’s representative of what every company experiences. It’s 2-3x more expensive just to serve an ad starting the first week of November. Doing that for 3 weeks results in massive incremental costs of advertising.

“Okay cool, I know my advertising costs are going up but our optimization efforts will probably offset some of that”

At the same time Marketing starts preparing for BFCM, product and engineering have to start preparing too. This roadmap can take up all of Q3.

This includes:

• Load testing

• Code freezes

• Rollouts for BFCM features

• Adding infra for promotions

• Additional security measures

The normal course of experimentation and product roadmaps go out the window for a slew of vanity upgrades and facelifts to websites just to make sure they’re presentable for a weekend.

While it’s impossible to A/B test against time, the opportunity cost lost from building features for BFCM vs continuing to build better product based on customer insights is quite high. It’s also frustrating and demoralizing for engineers who have a backlog they’d rather be working on. Too bad the CEO and CMO have their own agendas because they saw that the competition’s website has a cool new feature. Not to mention there’s always a code freeze which everybody loves. #sarcasm.

Which brings us to the day of Black Friday.

Day of

Palms are sweaty. Knees weak arms are heavy. That’s what everyone feels like going into Black Friday. And then the first sale comes in. And we’re off to the races.

A magical thing happens when items are discounted. Humans buy more. Turns out we like lower prices.

Companies are discounting anywhere from 7.5% to 33% but looking at costs as a % is tricky because many costs in retail and online businesses are fixed. So while it might be 33% of revenue you’re losing, it’s a much higher % of profit that you’re forsaking.

The additional challenge with discounting is brands have sales and discounts throughout the year. Going from 25% → 35% is unlikely to bring in incremental revenue / profit. But it always incurs incremental costs.

Sadly, few companies have the courage to A/B test discounts because they don’t want to know the answer.

Circling back to the point of humans love discounts, there’s a backend impact on more traffic: higher server costs and data costs. It’s minimal given how inexpensive cloud costs have become, but it’s still a cost that companies seem to ignore.

Companies must also account for the additional logistics cost.

The additional trucking, staffing, and agency costs for Amazon might be insignificant, but for smaller brands it’s a very important component of their cost structure which makes their profit margins even smaller on BFCM. But nobody seems to care until…

The week after

I love me a good postmortem. A deep dive on all the things good and bad. A time to reflect, note all the things to change for next year, file it away, and forget about it.

A couple things happen the week / month after BFCM:

• Increased returns

• Increased customer support

• Financials and accounting reconciliation

If you think about the type of customers that come in on BFCM, they’re price conscious, but more importantly they’re price intelligent. They know that BFCM comes once a year and deals can’t be skipped. That doesn’t mean they don’t have buyer’s remorse and all the emotions of being a human (can’t wait for A.I. to take over the world).

There’s a 30-60% increase in a company’s return rates around BFCM. That’s a large margin eroding activity if I’ve ever seen one. Combine that with increased customer support costs and again you’re eating into profits way quicker than expected.

Wrapping it up

So, the real question is are those discounts and sales driving incremental revenue?

Likely yes.

Are they driving incremental profit?

Hell no. 

Revenue ≠ Profit.

It boils down to a simple math equation. Is incremental cash in > incremental cash out.

The math rarely works out and brands shouldn’t advertise on Black Friday.

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