August 30, 2016

Healthy Business: Growth Metrics

Each company has a unique culture. Of course, you already knew that, but the culture frequently determines how healthy the business is.

When I worked at Lands' End, our Marketing Department was obsessed with 10% pre-tax profit, so much so that I am still obsessed with 10% pre-tax profit levels twenty-five years later. 

If you are Wal-Mart, then 10% pre-tax profit is not achievable (#grossmarginsaretoolow). But for most of us, 10% pre-tax profit is more than achievable. And at Lands' End, back in the day, there was always a vigorous back-and-forth about how to achieve 10% pre-tax profit. Acquire a lot of new customers? You protect the future, but you hurt your pre-tax profit rate today. Send the 51st catalog to a customer this year? You grow sales, but you make it close-to-impossible to achieve a high pre-tax profit rate.

Then I moved over to Eddie Bauer. The CEO, one of my favorite business people of all time, would announce that it was our job to "DRIVE SALES PROFITABLY". What the heck does that mean? It means you only had one choice ... you had to increase sales and you had to increase profit at the same time. You could not grow sales and hurt profit. You could not hurt sales and grow profit. That really boxed you into a corner. It shouldn't come as a surprise that sales/profit weren't healthy at Eddie Bauer, because the culture did not respect profit - how could it when profit could only improve if sales improved?

Nordstrom was a merchandise-centric organization. If you sold stuff the customer loved and did it at reasonable gross margins with good customer service and you minimized expenses and avoided overstocked items, the p&l worked. Oh, the p&l worked. We routinely generated 12% - 14% pre-tax profit and grew the top line at a healthy rate.

I've worked with 200+ brands since founding MineThatData. About 25% are able to increase the performance of metrics that align with a growing, healthy business.
  1. Increased Merchandise Productivity.
  2. Increased New Customers at an Acceptable Cost.
In the three examples above, only Nordstrom was able to do both. Nordstrom consistently grew Merchandise Productivity by finding merchandise customers loved. By doing this, Nordstrom could acquire new customers at an ever-cheaper cost, further growing the business.

Eddie Bauer had failing Merchandise Productivity. This put tremendous pressure on New Customer Acquisition - it became more and more expensive to find new customers, requiring the brand to discount more and more often, which grew sales but completely eroded profitability. The least healthy of the three businesses, Eddie Bauer had no positive metrics to speak of. You know what has happened in the 20 year since, don't you?

Lands' End had flat Merchandise Productivity. When Merchandise Productivity is flat, it becomes very hard to grow. Because the company had a policy of no discounting back in the day, the only way to grow was by spending more money on marketing to existing customers (i.e. Marketing Productivity) or by finding New Customers at an Acceptable Cost. Lands' End prospect catalogs from back in the day were a great example of Marketing Productivity - comparable new customer counts at a lower cost, driving up the number of new buyers, which grew sales and ultimately increased future (but not short-term) pre-tax profit.

This is why I harp on the two most important growth metrics.
  1. Increased Merchandise Productivity.
  2. Increased New Customers at an Acceptable Cost.
If you get this right, top-line sales grow, your ad-to-sales ratio looks great, and cash just drops to the bottom line. The healthiest businesses continually find merchandise that customers love, and the increased productivity makes it easier to find new customers at an acceptable cost.

August 29, 2016

Healthy Business: Ad-To-Sales Ratio

It's 2002. I'm sitting in the CMO's office (my boss) at Nordstrom. We're setting budgets for 2003. I look at the profit-and-loss statement, and two rows stick out to me.

  • Net Sales = $8,000,000,000 (yup, that's eight billion).
  • Marketing Expense = $144,000,000.
I pull out my calculator (yes, I had a giant calculator back in 2002 ... the CFO of the online channel called it the 'Green Monster') ... and I performed a bit of math.
  • Ad-To-Sales Ratio = $144,000,000 / $8,000,000,000 = 1.8%.
I looked at my boss, the Chief Marketing Officer. I asked a simple question.
  • "Is that right? Our ad-to-sales ratio is 1.8%?"
She gives me this dumbfounded look, and says something along these lines.
  • "I'm sure we could find ways to cut the fat out and lower it, if that's what you are asking."
That wasn't what I was asking.

Key competitor Macy's has an ad-to-sales ratio of around 6%. Their business is less healthy.

Many e-commerce brands have ad-to-sales ratios between 5% and 15%. They spend a lot of money on Search and Facebook. Many e-commerce brands "hack" their way to sales not by spending ad dollars but by optimizing the online experience coupled with word-of-mouth from social/mobile endeavors.

The best catalog brands have ad-to-sales ratios between 10% and 20%. Lands' End, currently struggling, has an ad-to-sales ratio of around 14%.

The worst catalog brands have ad-to-sales ratios between 25% and 40%. Yes, I said 40%. I see it happen all the time. You cannot tell a cataloger with a 40% ad-to-sales ratio to mail fewer catalogs ... the reason the ratio is 40% is because the staff LOVE to mail catalogs ... they get more satisfaction from putting a catalog together than they get from generating profit.

Ad-To-Sales Ratios are dependent upon Gross Margin percentages. If Gross Margins are north of 60%, you can absorb an Ad-To-Sales Ratio around 30%. If you are Best Buy, no such luck ... your Gross Margins might be +/- 25%. An Ad-To-Sales Ratio of 30% would bankrupt Best Buy. So your Ad-To-Sales Ratio must be sufficiently lower than your Gross Margin percentage.

Having said all of that, the most profitable brands I work, after accounting for business model and gross margin structure, have Ad-To-Sales Ratios that are low. Customers love the merchandise these brands sell, and consequently, they do not need to be advertised to in order to buy something.

In fact, the following sentence could be repeated after every blog post I write.
  • The most successful brands I work with earn customers who love the merchandise sold by the brand, and as a result, these brands do not need to advertise to generate sales."

August 28, 2016

Make Commerce Great Again

For the next few weeks, I'm going to talk a bit about what a healthy business looks like. 

Between my Diagnostics projects and my Merchandise Forensics projects, I have data points for about 100 e-commerce, retail, and catalog brands over the past three years alone. Good data points - one row for every item a customer purchased for the past five years. In a typical year, I analyze about 500,000,000 rows of customer purchase transactions ... about 5,000,000,000 rows since founding MineThatData.

Not Google-sized data of course ... but more transactions than your favorite vendor or trade journalist analyze within a Diagnostics / Merchandise Forensics framework.

So I know a little something about what a healthy business looks like.

If we want to Make Commerce Great Again, we're going to have to get away from our myopic focus on campaigns. You cannot understand how ants behave by studying individual ants. Similarly, you cannot understand how customers behave by studying individual campaign performance.

Tomorrow, we'll begin talking about healthy businesses. If the series goes well, I'll assemble a booklet based on the topic.




August 25, 2016

What Can I Do?

I know, I know, you are a Marketer and it is hard to figure out how to deal with your Merchandising Team. They have the reporting. They host the meetings. They own the Merchandise. You don't have any say, any input.

#Wrong.

I had the good fortune of working for an Accountant early in my career. Accountants were to 1990 what #DataScientists are today ... they had the data, and they knew how to calculate profit. This gave the Accountant an enormous advantage over everybody else in meetings.

I was invited to a meeting, way back in 1993. Catalog performance was being reviewed by a cross-section of business leaders ... Inventory, Finance, Creative, Merchandising, Marketing, Operations were all represented. Each catalog spread was pinned up on colored tag board:
  • Gold = 30%+ Variable Profit.
  • Green = 20% - 29% Variable Profit.
  • Blue = 10% - 19% Variable Profit.
  • Red = < 10% Variable Profit.
Each item in each spread was summarized via a profit-and-loss statement.

This is where the Accountant took over the meeting, though she didn't host the meeting.
  • "This item on page six has a 47% return rate. Why would we feature such an unprofitable item on page six?"
  • "Why is the best selling item in the catalog on page 139?"
  • "Did we purposely put crappy merchandise in this spread, and if so, why?"
  • "Do you realize that pages 20-39 were all Red, and therefore, all essentially unprofitable? This means I have to reduce circulation by 5% to make the numbers work. We cannot afford to lose that much demand. What is the plan to fix this next year?"
  • "Why did we only buy 800 widgets and then run out of widgets when last year this same spread sold 3,800 widgets? Why would we do that?"
Was the Accountant a popular person?

Nope.

Was the Accountant right?

Absolutely.

The Accountant became the GM of a Merchandise Category - and years later, founded a business and sold it to a major brand for tens of millions of dollars.

That's what you can do.

You can stand up for yourself.

When you are meeting with your Merchandising / Creative business partners, have the numbers ... sales ... profit ... all key metrics (#KPIs) at your disposal. You should create the reporting template. Make yourself indispensable. 

Not invited to the meetings?

Then create your own monthly reporting format that you circulate company-wide. Feature key customer metrics in your monthly report. Feature key merchandising metrics (including new item development and sales/profit estimates for all items). Tell the company what is working and what is not working.

Boss won't let you do this?

Do it anyway. Or create something similar. Or share your reporting outside of the Executive Team, teaching your co-workers what is happening. Best of all - start sharing your efforts with your Finance Team - those folks tend to enjoy learning more about the business.

Company culture won't let you do this? Go find another company to work for.

August 24, 2016

Promoting New Items

New Merchandise Development (#NMD) draws many parallels to sports.

Take my Milwaukee Brewers, for instance. They trade away veterans, and in exchange, they get prospects, prospects that may help the team win a World Series in 2022.

Now, what happens when the Milwaukee Brewers acquire a prospect? Do they hide the prospect? Or do they have a system in place to give the prospect playing experience?

They give the prospect playing experience! From Rookie Ball to Low-A to High-A to AA to AAA to the Major Leagues, there is a process in place to develop talent.

New Merchandise is to our business what Prospects are to the Milwaukee Brewers.

What process do we have in place to develop our talent (i.e. New Merchandise)?

For 85% of us, we don't have a process.
  • The cataloger hides new merchandise online and buries new merchandise on page 77 of a catalog, then boldly dots the cover of the catalog with a OVER 145 NEW ITEMS message. That's not a Process, that's a Best Practice. A Process is far more important.
  • The e-commerce brand promotes winning items in an effort to "optimize conversion" #optimize, then laments when conversion struggles occur three years later and there aren't any winning items left.
I work with companies that employ elements of a good New Merchandise Development Process (#NMDP). Let me give you a blended example of what good companies do.

This company launches 1,000 new products per year. It knows the following:
  • 200 of the items will achieve "Contending" status ... they will appear in the top 45% of annual item sales.
  • 15 of the items will achieve "Winning" status ... they will appear in the top 5% of annual demand or annual items sold.
  • Among items that achieve "Contending" status, the items average $3,000 in sales in the first three months after launch.
  • Therefore, all new items that generate at least $1,500 in sales in the first two months after launch are immediately promoted on landing pages, the home page, and most importantly, are featured in email campaigns.
  • This pushes more new items into "Contending" status ... instead of 200 per year, 300 new items per year become "Contenders".
  • 20% of Contenders become Winners next year.
  • Instead of 200*0.20 = 40 new Winning Items in two years, the process this company employs allows 300*0.20 = 60 new Winning Items to exist in two years.
New Items benefit from low-cost digital channels.

Winning Items explode by being promoted in high-cost offline/print/digital channels.

But by having a Merchandising / Marketing partnership, and by having a New Merchandise Development Process, the company has more winning items in two years. And by having more winning items two years from now, the company grows faster and is more profitable. Best of all - the company can prove that "x" winning items are generated because of a good New Merchandise Development Process.

August 23, 2016

Are You Stupid?

I'm on the phone with a Vendor Executive. The individual, well respected of course and somebody that 50 - 100 of you (+/-) work with, is questioning a tactic applied by a client. The conversation goes something like this.


Vendor: Why did you execute the strategy you executed?

Kevin: Because we had test results, and the test results replicated themselves more than a dozen times. We knew this strategy was the most profitable strategy. The tests confirmed the strategy, over and over and over again.

Vendor: But it's a dumb strategy, and you know it.

Kevin: We tested it.

Vendor: But why do the opposite of a best practice?

Kevin: Because we tested the opposite of a best practice, and the opposite strategy outperformed the best practice in twelve consecutive tests.

Vendor: Are you stupid?

Kevin: Wut?

Vendor: Everybody knows my strategy is right. It's a best practice. I don't care what your test results and actual customer behavior revealed. I'm letting you know we are implementing the opposite of your strategy, and we don't need your help going forward. In fact, we're taking over the marketing function at this company. We're going to do things the right way from now on, ok?

Kevin: Fine.

Vendor: I just don't get it. Are you stupid?

Kevin: If you are going to make a change, make it. But then be accountable for the results, good or bad. If you are right, brag about it. But if you are wrong, you better be ready to call me and tell me you were wrong. Are you willing to be held accountable if you are wrong?

Vendor: I know I am right. I am applying best practices. Everybody knows I am right.


The data-driven people have it all wrong, of course. For if this were a data-driven world, the Vendor Executive would steal these results and apply them broadly across the vendor ecosystem.

When I get myself into trouble, professionally, it's because I have test results that threaten the way somebody makes a living. My weakness is trying to appeal to the data, a strategy that seldom works when somebody makes a living requiring the opposite outcome I observe via test results.

Such is the case with the Catalog Vendor outlined in this post. 

Ask your vendor if they have tested their tactics? Ask to see actual results. When you hear the phrase "best practice" thrown out into the middle of a testing argument, be wary. And if the vendor executive asks "are you stupid", know in the back of your mind that you have identified a truth at odds with what the vendor is selling.

August 22, 2016

Steve Jobs

The business leader says this to me:
  • "I'm looking for the next Steve Jobs to run my Marketing Team."
The statement begs a series of questions.
  1. Describe the circumstances where the next Steve Jobs would elect to work in the Catalog Industry or E-Commerce Industry vs. any Silicon Valley based startup?
  2. How much are you willing to pay the next Steve Jobs to work at your company?
  3. How much autonomy will you give the next Steve Jobs, and how much will you micro-manage the next Steve Jobs, hindering the innovative progress the next Steve Jobs brings to the table?
  4. If the next Steve Jobs tells you that everything about your brand is "wrong" and you need to go through a five year period of re-invention that will be coupled with a 30% sales decline, do you allow the next Steve Jobs to see the vision through, or do you ask the next Steve Jobs to innovate within the constraints you put upon the next Steve Jobs?
As one Executive told me, "I need people who implement my vision. I don't need people who want to impose their vision upon my business." If that's the case, you don't want the next Steve Jobs, you want a drone.

We're caught between a rock and a hard place ... we're not going to lure the next Steve Jobs to manage the Paula Young catalog, and we aren't willing to pay a 27 year old $140,000 to mine the database for insights. And yet, we probably need both, don't we?

At a recent conference, a Professional told me that there was no way she'd trust a 30 year old to do anything of any responsibility. She may be right. Her company might not be able to attract/afford the 30 year olds who are going to become Steve Jobs, leaving her with a 30 year old she can't trust to do anything.

August 21, 2016

Moving Sideways

This is a perfect example of "moving sideways".

The term came from an article about Wal-Mart's e-commerce business ... an employee discussed doing things that are completely unproductive but cause everybody to feel busy, to feel like they are being strategic.

Look at the postcard once again.

Look at the dot.

"Check your email for your 10% off promo code."

Do you understand how hard it is to generate profit? Of course you do. You measure profit, right? RIGHT?

Pretend that the postcard costs $0.29. You have to increase the effectiveness of your email marketing campaign by a factor of 3.9 in order to generate the same amount of profit. Take a look at this example for a home-based brand.


What are the chance of quadrupling response?

And why spend $29,000 to quadruple response in an effort to generate the same amount of profit? What else could you do with the money? Something innovative? Or something like this, where you are moving sideways?

You can't listen to your vendor partners when it comes to marketing strategy. Of course your paper rep wants you to spend money on a two-step conversion process. Of course your printer wants you to spend money on a two-step conversion process. So you pay each party $29,000 and what do you get? Nothing. Not a penny. And that's assuming that you increase response by a factor of 3.9. You have to quadruple response just to break-even.

What in the heck are we doing?

Who are we listening to?

Now yes, there's a chance that response increases by a factor of 8x and this works wonders.

But on average, there's only a 10% to 20% chance that happens. The other 80% - 90% of the time, the paper rep and printer get paid, and all we get for our efforts is a shiny postcard with a two-step conversion process tied to a discount/promotion. What does that have to do with the merchandise we sell? Do we have any passion about the merchandise we sell? Think about it.

My goodness.

We're better than this.

This isn't a Wayfair issue. This is an industry issue. Our industry has been taught to believe that two-step processes tied to discounts are good strategy. A good strategy, of course, is to feature merchandise the customer has to purchase right now. And if you don't have merchandise that the customer has to purchase right now, well, you've identified the problem with your business, haven't you?

August 18, 2016

Answer to the Merchandising Question

How did you answer this question?

August 12 Question: Your merchandising team creates a new product line, one that is similar to an existing product line. The existing product line used to generate $10,000,000 in annual sales. Today, the existing product line generates $7,000,000 in annual sales, while the new product line generates $5,000,000 per year. Your merchandising team thinks that sales declined in the existing product line because the marketing team failed to properly market each product line. Your data shows you that customers rapidly switched allegiance from the old product line to the new product line. Describe how you will argue whether the new product is or is not a success when you meet with your Executive Team next week.


Can the candidate articulate cause/effect when cause/effect cannot be tested and can be argued a million different ways via a million different analytical techniques?

Can the candidate display empathy?

Can the candidate argue calmly when unjustifiably attacked?

Will the candidate ask for support from other Executive Team partners, or will the candidate fight alone?

Can the candidate sell a point of view that can only be proven via correlation?

Does the candidate just stare at you and say nothing?

The goal of the question is to reveal character.

In four out of five cases last week, I was looking for the candidate to reveal character.

In one out of five cases last week, I was looking for chops/competence.

I have a list of thirty-five questions I'd consider asking any Leadership candidate. I think it is important to constantly go back to questions that each candidate should answer ... allowing you to draw valid comparisons.

Time for your thoughts ... what did you learn? What did you agree with? What did you disagree with? What are you looking for in a Leadership candidate?


P.S.: Show me the merchandise that Wayfair features on the postcard? Oh, it's hard to tell? Of course it is hard to tell. The printer and the paper rep and the marketer win here ... Wayfair is selling discounts/promotions instead of selling MERCHANDISE.

You are better than this.

Don't listen to your vendor partners.

Listen to your co-workers.

August 17, 2016

Answer to the Email Product Assortment Question

Recall this question from last week?

August 11 Question: Your CEO wants items featured in email campaigns to be representative of "the brand", whatever that means. Your analysis shows that email campaigns perform 30% better when low-price-point items are featured. How are you going to argue your point with the CEO?


Tough question.


This is the classic "short-term optimization" vs. "long-term opportunity" question. In the short-term, you have the data that proves you are right. But you could poison the brand in the long-term by optimizing in the short-term.

This is the biggest problem I run across in my email analytics. The email guru, usually a Manager or Director, goes after short-term optimization tactics ... trying to maximize opens / clicks / conversions. After a half-decade, after a thousand messages that maximize opens / clicks / conversions via discounts, promotions, low-priced items, free shipping, and countless other games, gimmicks, and generic engagement nonsense (called 'codswallop' by some), the customer gets the message. The only customers who then respond via email are those who have been conditioned to perceive the brand as a brand that offers discounts, promotions, low-priced items, free shipping, and countless other games, gimmicks and generic engagement nonsense.

Meanwhile, the CEO is (hopefully) trying to protect the future of the "brand". As such, the CEO cannot possibly offer facts / figures that defend her point of view. She's going to argue from a position of faith.

Does the candidate side with faith?

Does the candidate side with short-term optimization?

Does the candidate offer a strategy not considered in the interview question?

The answer to the question should reveal the type of Leader this person will be. You are not just hiring this person to do a good job, you are hiring this person to protect the long-term health of your business.

In other words, the candidate better give you an answer that inspires Leadership confidence. A pithy optimization-centric answer without additional color / perspective likely disqualifies the candidate.