Urban Kōwhai: winning back the high street
Urban Kōwhai is a New Zealand outdoor apparel retailer with 14 stores and revenue of $28 million. Gross margin is 52%. Store foot traffic is down 18% year on year, while online sales are 22% of revenue and growing at 30%. A competitor, Trailhead, has opened six stores and prices core jackets 25–30% lower. Urban Kōwhai's average selling price for a core jacket is $180 and the cost is $86. The loyalty database has 40,000 customers who buy 2.1 times a year on average. The marketing budget is $1.2 million. Three proposals are on the table: (A) title-sponsor a national trail-running series for $650,000 plus $150,000 of influencer content; (B) spend $700,000 on performance digital marketing and $250,000 on a loyalty programme upgrade; (C) run a 20% discount across the core range for 12 weeks, expected to cost $900,000 in margin. The objective is to lift online to 32% of sales within 18 months while keeping gross margin above 48%. The board is split.
1. Calculate the gross profit per jacket at $180 and at a 20% discount, and assess whether Option C can meet the margin objective if 60% of discounted sales are to existing customers who would have bought at full price.
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Gross profit per jacket
- Full price: $180 − $86 = $94, a 52.2% margin.
- 20% discount: price $144, gross profit $58, a 40.3% margin.
Option C therefore cannot meet the objective of keeping gross margin above 48% on discounted sales. The discount cuts margin by 12 percentage points.
Cannibalisation
If 60% of discounted sales are to existing customers who would have bought at full price, only 40% are incremental. For every 10 discounted jackets:
- Lost gross profit on 6 existing customers = 6 × ($94 − $58) = $216
- Gained gross profit on 4 new customers = 4 × $58 = $232
- Net gain = $16
The break-even incremental share is 36 ÷ 94 = 38.3%. At 40% incremental, the discount is only just profitable in gross profit dollars. Any slippage in incremental share makes it loss-making. It also trains customers to wait for discounts and weakens the $180 reference price. The judgement is that Option C fails the margin objective and is fragile; it should not be the main plan.
2. Evaluate Options A and B using marketing principles such as segmentation, positioning, promotional mix and customer lifetime value, and recommend which better fits the objective.
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Option A: sponsorship and influencers
Cost $800,000. It reaches a broad trail-running audience and can build credibility and brand awareness. It fits a differentiated positioning against Trailhead's lower prices. But it is hard to attribute to sales, most of the audience may not be near a store, and influencer risk is uncontrolled. It also leaves only $400,000 for direct response.
Option B: performance digital plus loyalty
Cost $950,000. It targets the 40,000-customer database and can measure cost per acquisition and repeat purchase. The loyalty upgrade can increase customer lifetime value: at 2.1 purchases a year and $94 gross profit, average annual gross profit per customer is about $197. Lifting repeat purchase to 2.5 would add 0.4 × $94 = $37.60 per customer, or $1.5 million across 40,000 customers if achieved. Digital also allows testing and attribution.
Recommendation
Option B better fits the objective because it is measurable, targets existing high-value customers and supports online growth. But it should not be pure discounting: the loyalty offer should reward frequency and full-price purchases, not blanket discounts. Use a smaller version of Option A only if brand awareness is the binding constraint. Set a 12-month test: online share, gross margin, repeat rate and incremental gross profit. Option B is the stronger judgement, provided the loyalty programme is designed to protect margin, not erode it.
3. Explain how Urban Kōwhai should measure the success of the chosen marketing plan over 18 months, including two leading and two lagging indicators, and one way to avoid a false signal.
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Leading indicators
- Unique website sessions and store footfall, measured weekly against baseline.
- Add-to-cart or loyalty sign-up rate, measured by channel.
These move before sales and show whether the campaign is generating interest.
Lagging indicators
- Online share of total sales, targeting 32% within 18 months.
- Gross margin percentage, which must stay above 48%.
- Repeat purchase rate and customer lifetime value, to check that growth is not bought with discounts.
Avoiding a false signal
Use a control group or holdout in the loyalty database. Compare customers who received the campaign with a similar group who did not, over the same period. Otherwise a sales lift may simply reflect seasonality, a competitor's stockout or existing customers buying anyway. Also measure incremental gross profit after discount and exclude sales that would have happened at full price. Attribution windows should be fixed in advance. A dashboard with one leading and one lagging indicator per objective is better than a long list. If online share rises but margin falls below 48%, the plan is not successful under the board's objective.