September 21, 2014

Diagnostics: A "Developing Story"

One of the most important aspects of a good "system" is the ability to tell a story.

Now, I get it, many people are going to disagree with your story. That's fine. But your "system" should support the development of a story. In other words, as you drill down into the problem, you should be able to increasingly observe clarity, and be able to connect the dots.

In the example we've been working on this month, we observed productivity declines across both online and in-store channel. This strongly suggests that there is a merchandise productivity issue. The next above looks at the three key merchandise departments that this company offers.

What does the Mens column tell you?

What does the Womens column tell you?

What does the Kids column tell you?

It becomes painfully obvious that the Womens division is killing the company. Kids productivity is largely flat, or increasing slightly. The Mens division is growing nicely. The Womens division is in a free fall.

There are three key points we've identified, so far.
  1. Channel productivity is not a problem.
  2. Merchandise productivity is a problem.
  3. Womens Merchandise is dragging down the entire brand.
We have a "Developing Story", don't we? All good systems make it easy to identify the "Developing Story".

September 18, 2014

Have A Plan

Have a plan.

I frequently talk about the 2005-2006 timeframe at Nordstrom, when we killed a traditional catalog business, pulling $36,000,000 of advertising out of the mail, and still grew net sales.

You try pulling $36,000,000 of advertising out of the mail and still grow sales! It's not easy. Especially if you don't have a plan.

I recall sitting in the office of the Inventory Executive at Nordstrom Direct. This was a well-seasoned professional. She had no faith in "the plan" - and for good reason - she was a "data driven" person, and the "data" suggested that without catalogs, you would not generate sales online. Yup, that's what the data said.

But there was a plan. Yes, it was a plan based on faith. There wasn't data to suggest that the plan would work ... this was 2005, after all.
  • Stop renting names via the co-ops. 
  • Take Nordstrom names off the list rental and co-op market, permanently.
  • Remove $36,000,000 of catalog mailings from the mail stream.
  • Double the email frequency.
  • Move $15,000,000 or more into paid search.
  • Integrate the merchandise across channels.
  • Work as a team - encourage in-store associates to promote the website.
  • Produce a monthly catalog whereby each page was sold to vendors for $29,000 each - vendors picked the merchandise that appeared on the page.
That plan, as outlined right there, sure doesn't inspire confidence, does it? That plan had to recoup $150,000,000 in annual net sales. And when we mailed those vendor-funded catalogs and realized we'd only recoup $20,000,000 in annual net sales, well, geez, that didn't sound too good.

But then time progressed. Customer behavior shifted. We lost most of the customers who generated the $150,000,000 of catalog demand, and ultimately replaced them with $165,000,000 of online demand generated by customers who were much younger, and who liked the new assortment (which in many ways mirrored the retail assortment).

I get it. You come up with plans all the time - and your Finance team or Analytics team beat you over the head because you cannot prove that your plan will work.

Ignore them.

Have a plan.

And have faith.

Yes, you're going to be wrong, often. But if you listen to the Finance team, and if you listen to your Analytics team, you will never make anything more than tiny, incremental changes.

Have a plan.

September 17, 2014

Amazon and Merchandise Forensics

You read Benedict Evans, don't you (click here for a sample article about Amazon - the image to the right is from that article).

In this essay about Amazon, he cites this image, a refined version of one drawn on a napkin by Jeff Bezos.

Look at the arrows, look at the words.

Words/Phrases that are missing:
  • Multichannel.
  • Omnichannel.
  • Mobile.
  • Social.
  • 20% off Plus Free Shipping.
Sellers and Selection ... that's Merchandise.

Customer Experience? That's pretty important.

The essence of Merchandise Forensics is outlined in the image above. Merchandise improves the customer experience, which drives traffic, which attracts sellers (your merchandise vendors) which improves selection which improves the customer experience.

Is it possible that we're focusing on the wrong things, and that's why business isn't so great?

September 16, 2014

Diagnostics: When Merchandise Is A Problem

A good marketing/analytics system should be able to quickly diagnose the impact that merchandise has on business struggles.

I use the comp segment analysis to identify merchandising problems. Trust me - the comp segment analysis quickly identifies merchandising problems!

In this case, look at the online, in-store, and total columns, especially in the past two years. Both channels exhibit sales declines. Comp segment performance dropped by 4.5% in 2013, and has dropped by 6.0% in 2014.

This, my friends, is a business that is suffering from a bad merchandise productivity problem.

I cannot tell you how many meetings I've been in where the Executive Team calls the Marketing Team into the conference room, and then beats the marketing folks silly over sales declines. Then the marketing team performs a wonderful song and dance, trying to deflect blame while maintaining accountability. 

Most often, both sides have incomplete data.

80% of the time, I observe the situation outlined above. Customers are comparable, and spend by channel is in decline across all channels. This is a business that is suffering from a major merchandise productivity issue.

The issue, in this case, is merchandise. Customers don't want to buy the merchandise being sold by the company. My system quickly identifies the problem, and then allows one to dig in further, to uncover why there is a merchandising challenge.

The goal of any system is to eliminate doubt, to enhance clarity. There's simply too much data available today, and most of it is campaign-centric, meaning that few people can actually diagnose a business problem ... meaning that most can simply observe that a business problem is happening.

September 15, 2014

Diagnostics: Channel Shift

The "comp segment analysis" is one of the two big pieces in my business system. Here, I get to quickly diagnose what is happening to a business.

In this comp segment analysis, I analyze customers with exactly two in-store purchases and no other purchases in the past year. In other words, these are customers who are most likely to appreciate the in-store experience. If they are spending less in retail, then something is wrong.

The table shows us that something is wrong ... in stores.

I'm measuring subsequent twelve-month spend. First, look down the "Total" column. Retail customers are just as productive today as they were four years ago ... in fact, productivity increases at just under one percent per year. So retail buyers are not spending less ... in fact, they are spending more.

But look at the "Online" and "In-Store" columns. Retail buyers are spending twice as much online today as they were spending back in 2010. Clearly, retail customers are making a shift online. Now look down the "In-Store" column. Spend has declined, in each of the past three years. Oh oh.

The comp segment analysis quickly identifies the problem. Retail buyers are finding the e-commerce experience more desirable, and are shifting their spend online. This "system" quickly cuts through the problem ... the problem isn't customers, the problem is channels. We can immediately begin to think about the ramifications of a customer that may, in five years, spend $30 online and $65 in-store ... and we can think about what that means for the retail experience when too few customers are actually setting foot in a store.

I know, you've heard me talk about comp segment analysis for the past three years. Since I keep getting hired to run the analysis, it tells me you are choosing not to run the analysis. Run it!! Learn what is really happening with your business.

September 14, 2014

U2, Apple, Marketing, and Trust

Did you end up with a bunch of free U2 songs on your device, even if you have absolutely no interest in the band whatsoever (click here)?

I know, I know, you are a marketer and you think Apple did something noble by paying U2 $$$ to give you access to free music. It's a "gift without purchase"! Unless you don't like U2. Then what do you think it is?

The number one question I'm fielding here in late summer is this one ... "why, beyond our loyal customer base, are the rest of our customers defecting"?

I see this, over and over and over again. Loyal customers largely hang in there ... while the middle and the bottom of the customer file falls away, slowly. It's what is killing retail. It killed catalogers. 

I have to wonder ... do infrequent customers trust us? Do they trust us when they take advantage of a free shipping offer, only to see 30% off plus free shipping two weeks later?

If you are not a fan of U2, then Apple just gave up a slice of trust. You can probably get away with this a few times.

Measure how infrequent customers perform. If infrequent customer productivity is on the decline, consider whether the customer trusts your business model.

September 11, 2014

Cutting Through Nonsense

Any good marketing/analytics system cuts through the nonsense, and in short order.

When I'm called in to analyze a business, there is usually a problem, and there are differing opinions about the problem. Most often, sales are in decline, or sales are not growing at a rate that meets corporate expectations. So I'm asked "why"? Why aren't sales meeting expectations?

Remember the forecasting tool I discussed? The forecasting tool is an awful lot more than just a forecasting tool. It is part of a system designed to highlight weaknesses. I can quickly see if customer acquisition is a problem (it often is). I can quickly observe if customer loyalty is suffering (it sometimes is). I can easily understand if spend per customer is an issue (it often increases, masking other issues).

In other words, the forecasting tool is part of a much bigger and more important system. The forecasting tool also identifies business struggles.

And when a business is struggling, the business is usually struggling because of merchandise performance.

Look at the table above. This table represents what I call "comp segment performance". I take customers with exactly two purchases in the past year, and then measure the spend for these customers in the next "x" months. Because I am only analyzing customers with exactly two purchases in the past year, I omit most customer acquisition issues, and I omit the problems observed in catalog marketing with highly productive customers who receive an ever-increasing number of catalogs. The changes in productivity are merchandise-centric, or they are channel-centric.

The comp segment analysis is maybe the most important part of my "system". It allows me to quickly diagnose the problems that plague a business.

September 10, 2014

Creating A Growth-Based Catalog Vendor Ecosystem

Several years ago, I got to the end of a contact strategy project. The EVP, an earnest and good person, looked at me and said, if I may paraphrase: "I don't want more profit, we already generate plenty of profit. That's good enough. I need to grow. I need market share. Why do you care more about profit than market share? Real marketers care about market share!"

And with that, the two individuals I spoke with departed, sent me my check, and did not implement four weeks of hard work. I never heard from the company again.

Catalogers are at a crossroads. There are two business models that folks employ.

  1. Gain market share. Think Amazon. No profit for, well, ever. They just reinvest every penny back into the business, gaining market share in the process. Maybe they are the largest pyramid scheme in history, maybe they are the smartest direct marketers in history. It's one or the other. But make no mistake, they gain market share, at the expense of profit.
  2. Generate profit. Think Nordstrom. Nordstrom is a money printing machine. It's not uncommon for Nordstrom to generate 13% pre-tax profit or better - go look it up for yourself in their SEC filings. A sales associate, working in a retail store at Nordstrom, can earn $100,000 a year, five times what is earned at most retail brands. Now, they could be a much larger business, they could discount their way into oblivion to grow, and the could invest more than 2% or 3% of their net sales on marketing, in an effort to significantly grow. But they don't do that. They just print money.
Again, two types of businesses ... market share without profit ... or plenty of profit (which often leads to market share or leads to a smaller business that is much more profitable).

What type of business does the average catalog executive run?

Neither!

Most businesses straddle the middle, and obtain tepid results (think Macy's ... less than 5% pre-tax profit on a business that could happily grow much faster with no profit, or generate 15% pre-tax profit if it wanted to, but it would be a smaller business).

If you truly believe in the market share business model, then it is time to change how you do things. No more half-measures, for I'm tired of hearing the grumblings without any effort to create a growth-based catalog vendor ecosystem.
  1. Spend every penny of anticipated profit on customer acquisition.
  2. Demand that the co-ops and printers give you close-to zero variable cost solutions ... penny names from the co-ops, minimal profit from printing from the printers, and significant discounts from the USPS (they're giving e-commerce businesses incentives to ship boxes, lobby for significant postage discounts for spending amounts 10% above a baseline level). This allows you to invest even further, allowing you to grow faster, allowing you to increase market share.
And if you're not willing to do the hard work in (1) and (2) above, then you truly don't believe in the market share model, in spite of what you tell me. In that case, why not choose to be highly profitable, even if it means your business gets a bit smaller?

September 09, 2014

Now It's Time To Negotiate With The Co-Ops, Dear Catalogers

Remember yesterday's example (click here to remember the post)? You invest 8,500,000 catalogs with your printer, and with your co-op, in order to transform your business from a business that generates $2,500,000 of pre-tax profit on $50,000,000 in annual sales to a business that generates $55,950,000 in annual sales at break-even.

It's time for you to have a heart-to-heart discussion with your vendor partners. Think about the co-ops, for instance. How much additional work do they have to do to put the last 100,000 of the 8,500,000 co-op catalogs in the mail? None. No additional work whatsoever. Zip. Zero. It's all profit.

So why are you paying them $0.06 or $0.05 or whatever they are charging you for those additional, incremental names?

The co-ops have your spending history - meaning they know, by year, what your investment level has been. So if you want to put an incremental 8.5 million catalogs in the mail, for crying out loud, they should be charging you just a penny a name to do it. They should be encouraging you to greatly overspend, shouldn't they?

Profit for 8,500,000 catalogs at a 40% profit factor and $0.50 catalog cost and $0.06 co-op cost and $0.70 per book estimate = ($2,380,000).

Profit for 8,500,000 catalogs at a 40% profit factor and $0.50 catalog cost and $0.01 co-op cost and $0.70 per book estimate = ($1,955,000).

Look at that! You make an additional $400,000 because of co-op concessions. If you cannot afford to mail the names, they make $0. If they give you the incremental names at a penny each, they make $8,500,000*0.01 = $85,000 ... enough to hire one additional analyst or enough to simply pocket profit.

Why are you not negotiating with the co-ops in this fashion?

And the same thing goes for your printer. Yes, your printer. If your printer gives you a $0.02 concession, and your co-op charges you just a penny a name, then you've got something:
  • Profit for 8,500,000 catalogs at a 40% profit factor and $0.48 catalog cost and $0.01 co-op cost and $0.70 per book estimate = ($1,785,000).
You keep telling me that you'd rather grow than to generate pre-tax profit. Did I not outline a path for you to grow, throwing away all your profit in the process?

This avenue causes three things to happen.
  1. Your business grows, and that's what you are telling me you want.
  2. Co-ops increase net sales.
  3. Printers increase net sales.
Explain to me why this is bad for your vendor partners? I'm not asking them to lower prices on your base expenditure ... just every incremental dollar beyond your base expenditure.

Explain to me why this is bad for your business? You keep telling me you'd rather grow top-line sales than profit. In this case, you grow top-line sales. Sure, you have no profit left, but you keep telling me you want to compete against Amazon - they don't generate profit - and they grow. You keep telling me that sales growth and customer file growth is more important than profit. Well - how important is it to you? This is your moment. Put your chips in the middle of the table and grow, or have me put an algorithm together for you to greatly increase profit. Pick one, or the other.

But again, if you want to grow, then what I outlined here allows your business to grow, allows the co-ops to generate more profit, and allows your printer to generate more profit.

Pick growth, or pick profit. It's time to choose.

September 08, 2014

Pick A Path

We all know that Amazon plows every penny of profit back into CapEx.

Meanwhile, here in catalog land, we run a $50,000,000 business that generates $2,500,000 of pre-tax profit ... 5% ... not good ... not awful ... just a mediocre level of performance.

Let's say that you took that $2,500,000 of pre-tax profit, and ran it back into what are currently unprofitable customer acquisition activities.
  • Average Catalog Cost = $0.50.
  • Expected $ per Book, Incremental 8,500,000 Co-Op Names = $0.70.
  • Profit Factor = 40%.
  • Co-Op Cost = $0.06 Per Name.
  • Extra Co-Op Mailings = 8,500,000.
  • Extra Co-Op Demand = $5,950,000.
  • Extra Co-Op Profit = $5,950,000*0.40 - 8,500,000*($0.50+$0.06) = -$2,380,000.
  • Total Company Pre-Tax Profit = $2,500,000 -$2,380,000 = $120,000.
Look at that. You just grew your top-line by 11.9%. Did you generate profit? No.

This is what Amazon is doing.

Your business is stalled at $50,000,000 and you cannot increase merchandise productivity. You are stuck.

You could forgo profit ... all profit ... and invest every penny of anticipated profit with your co-op partners ... and your business might grow by 10% or 11% or 12%. You trade profit for growth.

Do that for three or four years, and all of a sudden your $50 million dollar business is a $65 million dollar business.

You get to pick.

Do you want profit? If so, you limit growth.

Do you want growth? If so, you limit profit.

Your choice.

Pick a path.