Direct Gardening Association - Agenda

Click here for a tri-fold agenda for the Direct Gardening Association conference in Burlington, VT, in July - I'm speaking on Wednesday morning.  Come join me!

Merchandise Forensics: Top Items

It's the "hip" project right now ... identifying the reason why the business is struggling.

There's usually two reasons.

1. Inability to acquire new customers at an acceptable cost.
2. A decline in merchandise productivity, usually caused by a failure to develop highly productive new items.

Here's a tidbit for you.

• Calculate the average demand you generate, per item (say it is $12,000).
• Multiply this rate by 2.5 ($12,000 * 2.5 = $30,000).
• Let this be your "criteria for success".

In other words, in our example, we want items that generate at least $30,000 of annual demand.

This threshold often accounts for items in the top 10% to top 25% of the merchandise productivity spectrum, so you're looking at really productive items.

Now, for the past five years, identify how many new items ever achieve this level of productivity?  Is the rate increasing, or decreasing over time?  Is the quantity increasing, or decreasing, over time?  How many years does it take an item to hit this threshold?  How many years does it take for an item to fall below this threshold?

The secrets to your business are outlined in the questions above.  Combine this information with your ability to acquire new customers at low costs, and you're well on your way to understanding/fixing the dynamics of your business.

Five Tools - Employees

All week, we've been talking about five tool baseball players.

• Hits for average.
• Hits for power.
• Can run the bases.
• Can field.
• Can throw.

Yesterday, we talked about five tool customers.

Today, we'll chat about five tool employees.

What are the five skills that an employee must possess?

That's a tough question to answer, isn't it?

• Curiosity.
• Integrity.
• Vision.
• Profit-Focused.
• People-Skills.

What would qualify as your five tools that the best employees possess?

Five Tools - Customers

Yesterday, I introduced the concept of a 5-tool baseball player.  Great baseball players:

• Hit for average.
• Hit for power.
• Are good base runners.
• Are good fielders.
• Can throw the baseball well.

The same concept holds for customers.  The best customers possess five tools:

• Purchases Every Year.
• Purchases Multiple Times Per Year.
• Purchases Multiple Items Per Order.
• Purchases High Margin Items.
• Purchases Without The Aid Of Advertising.

I know, you're going to say, "well, the customer buys from multiple channels".  Well, no.  That's a byproduct of purchasing multiple times per year.  You don't care what channels the customer buys from.  You care that the customer possesses each of the five tools listed above.

If you want to create a fun dashboard, why not create one that evaluates customers on the basis of the five tools listed above?

Dear Catalog CEOs: A Five Tool Player

Dear Catalog CEOs:

In baseball, there is a player called a "5 Tool Player":

• Hits for average.
• Hits for power.
• Runs the bases well.
• Throws.
• Fields.

Obviously, these players are hard to find.  Terribly hard to find.  I possessed exactly zero of the skills when I played baseball in high school.

What are the five tools that yield an outstanding business executive, a person who could run your company and chart a viable course into the future?

How many employees in your current pipeline have all five tools?  How many could replace you?  After all, it's your job to make sure that there are a ton of five tool business leaders in your organization, correct?

We keep outsourcing tools, don't we?

And in the process, we're struggling to develop talent.  Something needs to change.  You can make these changes.

Draft and Develop

In 2005, the Green Bay Packers had a quarterback named Brett Favre.  You might remember him.  Three MVP awards, two NFC Championships, one Super Bowl Title.  Future Hall of Famer.  He would play for six more seasons (2005 - 2010).

And yet, Ted Thompson drafted a Quarterback named Aaron Rodgers.  At the time, the decision was kind of a head scratcher.  In retrospect, it was a wise, wise decision.  Via a "draft and develop" philosophy, Mr. Rodgers was groomed to become the starting quarterback.

What does this have to do with talent in e-commerce / retail / cataloging?

You keep telling me you cannot find talent.  Especially at the Manager / Director level.

Well, I've prepared a brief quiz for you.  If the answer to each question is "no", it is time for you to consider a "draft and develop" program for your marketing team.


Question #1:  Are the salaries paid by your company consistently in the top 35% of your industry?

Question #2:  Is your company considered a leader in mobile or social?

Question #3:  If you made an offer to a prospective employee, and Google/Facebook made the same offer to a prospective employee, would the employee choose your brand?

Question #4:  Is your company headquartered in a major metropolitan area that is considered a trendy place to live/work?

Question #5:  When you have a job opening, is the position filled within 2-3 weeks, due to an ample quantity of highly qualified candidates?


If you answered "no" to each question, it is time for a "draft and develop" program.


Key Elements of a "Draft and Develop" Program.

1. Hire talent right out of college.  Unemployment rates among Jasmine's generation are terribly high, and yet, these graduates have unprecedented tech / mobile / social skills.
2. Pay 20% or more above industry average, and use this as part of your advertising/recruiting strategy.
3. Clearly communicate to the prospective employee that they are being trained and developed, and will possess highly marketable skills in twenty-four to thirty-six months.
4. Develop a "plug and play" process ... new employees go through a rapid training process ... make it so that your "program" can be quickly learned and mastered.
5. Hire each candidate on a 90 day conditional basis ... promise to pay six month's of salary/benefits, but give yourself the ability to separate from the employee if skills aren't a good match.
6. Give a significant salary increase at six months, to reward those who make good progress.
7. After eighteen months, create a "Sr. Analyst" tier, and ask those in the "Sr. Tier" train new employees.
8. Identify the rare, gifted employee.  Fast track this individual into Management.

I know, this is the opposite of what you are used to doing.  But everything you've been doing for thirty years is leading you astray!

First, organizations have "flattened out" ... you no longer see 1 VP and 3 Directors and 6 Managers and 14 Analysts ... with a clear and achievable career path.  These days, you get 1 VP and 2 Directors and 4 Analysts ... with remaining skills outsourced to vendors.

Why not evolve to 1 VP and 11 Analysts, with the occasional Director/Manager position reserved for the rare, gifted employee?  You'll spend the same amount on salary/benefits, but you'll keep knowledge in-house (as opposed to outsourcing all of the knowledge of your business to vendors).  You'll be able to identify talent and reward it over time.  You'll be able to remove poorly performing employees quickly.  And you'll tap into a big market of tech / social / mobile savvy employees who can help you evolve into future marketing strategies.

Draft and Develop.

If what you're currently doing is not getting the job done, why not consider Draft and Develop?

Discuss.

40% Off

This is pretty much the limit, as far as pushing the peanut on percentage off promotions.

I suppose you could go to 49% off plus free shipping.

Once you get to 50% off, you're in the realm of clearance, and that sets off a whole different customer mindset.

There are at least four theories, surrounding discounts and markup.

The first theory is that you are able to charge a high markup as a premium for offering highly desired merchandise.  The most successful companies I work with tend to earn gross margin rates that are in the low 60% range.  In other words, the $49.99 item that we purchase costs the business $20.  This business model works really well in fashion, and for proprietary merchandise (i.e. items that others cannot easily replicate/duplicate).

The second theory is that you charge a high markup, so that you can stimulate demand by marking down the item.  The $49.99 item that costs the business $20 is manipulated ... take 40% off ... so that the customer perceives that a $29.99 item that costs the business $20 is a great deal.  This is the JCP model.  Once you go down this path, you cannot reverse-engineer it.  You can't.  You've built a customer file that loves playing the game ... take the game away, and you take the customer away.  For this model to work, you need (in my example) three times as many customers to purchase the item to generate the same amount of profit.  This model can work well when merchandise is a commodity.  This model almost becomes the default when competition is stiff.

The third theory is that you charge a small markup, so that you can stimulate demand by offering everyday low prices.  The $24.99 item that costs the business $20 yields $4.99 profit ... you need to sell six times as many items to generate the profit you generate at $49.99 ... however, you change the marketplace by offering low prices, and this change drives out the businesses that offer comparable items at $49.99.  This is congruent with Wal-Mart, or Amazon.  This model results in what the pundits like to call "scale", and offers significant competitive advantages.  Of course, it's terribly hard to "scale", isn't it?

The fourth theory is desperation.  Business is not meeting expectations, so you simply start discounting.  10% off.  Sales increase.  Wow!  Next year, 10% off doesn't get you anything.  15% off.  Sales increase.  Wow!  Then sales flatten again.  Then it is 20% off.  25% off.  30% off.  35% off plus free shipping.  40% off plus free shipping.  You can pretty much take this model to 49% off plus free shipping before customer perceptions change.

The first three theories are viable business strategies.

The fourth theory aligns with what most of us do, and there are unintended consequences that offset the short-term sales increase you get from discounting.  Just analyze your customer file, and you'll see the unintended consequences, when viewed over time.

Decoupling: The iPad

Here's what I want you to try:

• Select every customer from your database who purchased via an iPad in the past year.
• Measure the percentage that purchase via an iPad on the very next purchase.

If the percentage is greater than 50%, your mobile business is in the process of decoupling from the e-commerce experience.  You've got excitement, and you've got challenges.  Both will make coming to work worthwhile.

If the percentage is less than 20%, your mobile business is not being embraced by your customers ... on a subsequent purchase, the customer migrates away from the iPad.

Or lump the iPad and iPhone and all Android devices and Blackberry devices and Windows Mobile together ... and run the same metrics above.

Increasingly, I am analyzing businesses where the customer is in the process of decoupling from e-commerce.  If this is your business, then you need to stay on top of it.  You need to be all over it!!

Decoupling is interesting - it works opposite of what the experts tell us.  The customer makes a decision, and changes behavior.  When this happens, we sub-optimize the customer experience by forcing the customer to tether herself to old-school channels.

Decoupling: Email Marketing

Leave your desk right now, and have your analytics guru run a query for you:

• From May 14, 2012 to May 13, 2013, calculate the average price point purchased by marketing channel.
• Compare email marketing to every channel.

What do you see?

There's a high probability that the average price point purchased via email marketing is lower, significantly lower, than all other channels.

This happens when you hyper-optimize a marketing channel.

Email marketers hyper-optimized their channel.  20% off.  Free shipping.  Gotta get open rates up, who cares about the profit and loss statement, right?

Over time, the email customer file was built, and it became fundamentally different than the rest of the business.  It's not uncommon to observe an email customer file that purchases items 20% cheaper than those purchased by the rest of the business.  It's not uncommon to observe an email customer file that buys 75% of items via discounts/promotions, whereas 20% of the remainder of the customer file purchases via discounts/promotions.

Once this happens, the email customer file has been decoupled from the rest of the business.  Integration with the rest of the business becomes sub-optimal, and for good reason ... you're dealing with a fundamentally different customer.  It's a lot like JCP abandoning discounts/promos and being thumped over the head with a bag of oranges, to the tune of a -25% to -30% comp store sales performance.

When you decouple the email customer file from the rest of the business, you actually have freedom to make changes, to reverse the process of multichannel/omnichannel integration.  Use email marketing to play to the strengths of customers who buy from email marketing ... those customers receive versions tailored to their interests.

Dear Catalog CEOs: Decoupling of Demand

Dear Catalog CEOs:

It's happening ... and it's happening largely opposite of what you were told.

I remember being at Eddie Bauer, way back in 1998.  Our e-commerce business went from a million in 1996 to something like five million in 1997 to about fifteen million in 1998.  We observed a funny thing about that fifteen million in demand in 1998.

• It was heavily skewed to male-gender merchandise.

In other words, the demand generated online reflected the audience that was using the internet in 1998.  And when demand launched toward sixty million in 1999, well, those thoughts went out the window.  Demand was more reflective of total direct channel demand, and the concept of "multi-channel integration" was born.

That's what folks focused on.  Integrate the business.  Make everything the same, same merchandise, same offers, same creative ... same same same.

This made sense (to some) as the baton was handed from old-school cataloging to modern e-commerce.

But once the baton was formally passed, a funny thing happened.

The trends that we observed at Eddie Bauer, way back in 1998, have reappeared ... in reverse.

E-commerce now dominates the share of demand generated by the vast majority of catalogers.  But go take a look at the items that customers shopping your call center purchase.

You remember your call center, right?  It's the building with old-school corded phones that took in 90% of orders in 1996 ... that same building that now captures 2% to 22% of orders today (unless your customer is June, of course).

Rank-order all items that sell at your contact center ... first to number one hundred.  Then compare those items against the top-selling items from your pay-per-click program, or the top-selling items from your email marketing program.

Yup, they're different.

In other words, we're in the process of decoupling demand.  All of the integration activity of the past ten or fifteen years is becoming much less important, as small tribes of like-minded customers pick and choose the channel that they prefer.

This is our future ... it's opposite of what we were told.  Small tribes of customers, with unique preferences, shopping the way they want to shop, buying the merchandise they want to purchase.  Our job, of course, is to respond to this trend in the most profitable way possible.  

Sameness seldom results in the most profit.

It's time to get busy serving unique cohorts of customers.