July 25, 2016

Payoff Horizon

Let's work through a very simple example.

Let's say that there are only two customers I can acquire each year.
  • Each newly acquired customer generates $20.00 profit in year one, $12.00 profit in year two, and $8.00 profit in year three.
  • Customer #1 can be acquired at a loss of $10.00.
  • Customer #2 can be acquired at a loss of $25.00.
What should the strategy be for this company?
  1. Do not acquire either customer, because the company loses money acquiring the customer?
  2. Acquire only Customer #1, since Customer #1 is generated at a better profit rate than Customer #2?
  3. Acquire both Customer #1 and Customer #2 each year?
This can be answered easily, by simply doing a bit of math. Let's run a three year scenario for each strategy.

If we do not acquire either customer, then here's what happens.
  • Year 1 = $0.00 profit.
  • Year 2 = $0.00 profit + $0.00 profit.
  • Year 3 = $0.00 profit + $0.00 profit + $0.00 profit.
  • Three Year Profit = $0.00.
Let's say for each of the next three years, we only acquire Customer #1 each year.
  • Year 1 = -$10.00 + $20.00 = $10.00 profit.
  • Year 2 = $12.00 (from year 1 customer) + (-$10.00 + $20.00) = $22.00 profit.
  • Year 3 = $8.00 (from year 1 customer) + $12.00 (from year 2 customer) + (-$10.00 + $20.00) = $30.00 profit.
  • Three Year Profit = $10.00 + $22.00 + $30.00 = $62.00.
Let's say that for each of the next three years, we acquire both Customer #1 and Customer #2. We already know the following for Customer #1:
  • Year 1 = $10.00 profit.
  • Year 2 = $22.00 profit.
  • Year 3 = $30.00 profit.
So let's run the same scenario for Customer #2.
  • Year 1 = -$25.00 + $20.00 = $5.00 loss.
  • Year 2 = $12.00 (from year 1 customer) + (-$25.00 + $20.00) = $7.00 profit.
  • Year 3 = $8.00 (from year 1 customer) + $12.00 (from year 2 customer) + (-$25.00 + $20.00) = $15.00 profit.
  • Three Year Profit = -$5.00 + $7.00 + $15.00 = $17.00.
In total, then, the company that acquires both Customer #1 and Customer #2 generates the following:
  • Year 1 = $5.00 profit.
  • Year 2 = $29.00 profit.
  • Year 3 = $47.00 profit.
  • Three Year Profit = $5.00 + $29.00 + $47.00 = $71.00.
Which business do you wish to manage?
  • Do Not Pursue Customer 1/2 = $0.00 + $0.00 + $0.00 = $0.00 three year profit.
  • Pursue Only Customer #1 = $10.00 + $22.00 + $30.00 = $62.00 three year profit.
  • Pursue Customer #1 + #2 = $5.00 + $29.00 + $47.00 = $71.00 three year profit.
If your goal is to never lose money acquiring customers, you go with the first strategy, and in three years, you have no incremental new profit.

If your goal is to maximize 12-month return on investment, then you go with the second strategy, and three years from now you have a customer file generating $30.00 of incremental profit, and for the three-year period, you generated $62.00 profit.

If your goal is to maximize the long-term health of your business, then you go with the third strategy, and three years from now you have a customer file generating $47.00 of incremental profit, and for the three-year period, you generated $71.00 profit.

THIS IS WHY YOU HAVE NO CHOICE BUT TO CALCULATE LIFETIME VALUE.

NO CHOICE.

Don't you think your Executive Team wants to have a discussion about whether they should pursue just Customer #1 or pursue both Customer #1 and Customer #2 each year?

Ever wonder why your business doesn't grow? Maybe you are not pursuing Customer #1 and you are not pursuing Customer #2.

Ever wonder why your business grows slowly? Maybe you are not pursuing Customer #2.

Ever wonder why profit as a percentage of sales is sluggish but total profit is good? Maybe you are pursuing both Customer #1 and Customer #2.

Show of hands ... 
  1. How many of you calculate Lifetime Value?
  2. How many of you know specifically which of the three strategies outlined above your business should execute to achieve company goals?
If you didn't raise your hand to #1, it's time to hire somebody like me, or hire your favorite vendor. There are many credible vendors who can help you measuring long-term value.

If you didn't raise your hand to #2, don't you think it is time to learn what your business will look like in the future based on different payoff horizons? Contact me now (kevinh@minethatdata.com) and let's get busy.

July 24, 2016

Lifetime Value Week

On Twitter, I get a lot of questions about lifetime value.

Lifetime Value, or "LTV" as some call it, is simply a measure of the future profit generated by a customer acquired today. There are 22,493 ways to calculate LTV ... so the point of this week isn't to teach you how to calculate LTV, though I will certainly share my thoughts about how I calculate it. Too many pundits, vendors, and analytical gurus will complain about any calculation style ... they're missing the point ... less than 10% of the companies I work with even bother to calculate LTV in the first place. Why have an argument about how to calculate LTV when almost everybody chooses not to calculate LTV?

Here's the interesting thing ... almost any statistical model created on an annual basis has LTV essentially built into it. Smart marketers who avoid all of the nonsense about individual campaigns tend to elevate the value of LTV to (at minimum) Marketing Leadership and Finance Leadership.

LTV requires the marketer/analyst to measure profit. Without profit, LTV has no meaning whatsoever. Who cares that a customer will spend $90 in the next twelve months if only 30% of sales flow-through to profit and the company will spend $30 in ad cost marketing to the customer?

Why was the last paragraph important?
  • Profit = $90.00 * 0.30 - $30.00 = $27.00 - $30.00 = ($3.00).
See what I mean? That $90.00 LTV value is meaningless because it represents sales, not profit. Profit equates to a loss of $3.00. #OhBoy.

LTV, when measured in terms of variable profit (what some call "contribution" ... essentially it is profit prior to subtracting fixed costs), takes one of two trajectories.
  1. LTV is low, and tends to drop off quickly when annual repurchase rates are low.
  2. LTV is plentiful, and can actually increase over time if the customer has a 75% or greater annual repurchase rate and purchases 6+ times per year.
(1) is the reason that so many catalog brands are stuck and cannot grow. They cannot harvest enough long-term profit out of the customer (due to low annual repurchase rates and high ad-to-sales ratios) to overcome the steady decline in co-op response rates.

(2) is the reason that Wal-Mart, Amazon, Starbucks, McDonalds and many other "mega-brands" are what they are ... the customer purchases over and over and over and perpetually generates a mostly constant level of profit ... and this is what leads to the loyalty gurus claiming credit for their efforts (though their efforts have minimal impact on loyalty).

The worst companies spend to a cost-per-new-customer, independent of profit.

Good companies tend to calculate 12-month future profit for new customers, and invest in new customers to optimize twelve-month total profit among first-time buyers.

The best companies calculate future value for EVERY CUSTOMER in the database, regardless of where the customer is in the customer lifecycle. This allows the best companies to maximize future profit from EVERY CUSTOMER in the database.

More on this topic tomorrow.

July 21, 2016

What Is The Right Customer Database For You?

The buzz out there is that customer databases are important.

I'm here to tell you that people are important, and most of us do not hire the right people to do a credible job of getting the most out of a customer database.

Here's what I hear, often.
  • Client #1:  We outsource our database to Barple (name made up to protect the innocent at database companies). Those people are hacks, they have no idea what they're doing. Who should we partner with?
  • Client #2:  We outsource our database to Barple. Those people are wonderful!! Best investment we ever made.
I've heard glowing praise of Barple and outright contempt for Barple ... and the same employee at Barple is mentioned in each case, by name!!! Let that one sink in for a moment.


Time for a story.

I worked with a company. The company hosted their database in-house. The company was highly dissatisfied with the fact that they were getting no credible insights to help grow/fix their business.

The company chose a leading customer database provider.

The company went through the requirements process. The company struggled mightily to survive the requirements process, simply because it did not have the in-house talent to articulate what credible requirements were. As a result, the IT team contributed too many requirements ... and the requirements ended up reading like the IT team was running marketing, and not the marketing department. What was asked for was what an IT team would ask for if they ran the marketing department.

Then the database provider built the database. A nine-month process took fifteen months, angering all sides (including the database provider, who never got the information they needed in a timely manner).

The database was finally available for use.

Executives waited for the insights that were predicted when the company spend $$$ with the vendor.

Existing staff said that the database was hard to use, and they should have said this. They were not trained to query a big database, they had no interest in querying a big database, and the big database was structured to support IT-style marketing requests.

No insights followed.

Existing staff stopped using the database and reverted back to vendor-centric reporting.

The Executive Team was angry.

The Marketing Team was angry with the Database Provider.

Databases have nothing to do with databases. Databases have everything to do with the people accessing the database. Are the people talented enough to access the information, translate the information into actionable findings, and then communicate the findings in a way that causes people to make better decisions?

Our problem is a talent/people problem, not a database problem.

You should see the project work I do ... I ask for data in a clear and specific manner, and what is delivered to me is, to be kind, problematic in 40% of the cases. It's as if nobody ever looks at the actual data.

The longer you talk about the merits of an in-house database or which vendor is best or any of the other stuff that sounds strategic but isn't, think about changing course. The reason you're probably not happy with your database is because you haven't hired the right talent to actually use the database.

Ok, your turn. Tell me why I am wrong. What am I missing?

Relationships

I'm presenting information ... #datadriven stuff, no less. In other words, I have facts to back up what I'm asking business leaders to do.

As I tell the audience to take a break, one of the attendees walks over to me. Here's how our conversation goes.


Attendee: You realize that our industry is a relationship-based industry, right?

Kevin:  Tell me what you mean by that?

Attendee: You are asking me to change my marketing strategy, right?

Kevin: If you want to attract new customers, yes.

Attendee: Yes, I want to attract new customers. But here's the problem. If I do what you say, then I walk away from people I have relationships with.

Kevin: You mean your co-workers?

Attendee: No, I don't spent a lot of time with my co-workers. I'm talking about vendor partners. I've worked with these people for thirty years. If I do what you are telling me to do, I'll have to walk away from these people. These people are the reason I work in this industry. They are the people I care about.

Kevin: Are you saying you would rather have your company make less money so that you can allocate company resources to the vendors who you like spending time with?

Attendee: It doesn't sound so good when you say it that way, does it?


It's not common anymore for me to sit in a meeting with both marketing and merchandising professionals. Used to happen all the time. But something broke in the marketing/merchandising relationship in the past ten years ... and the beneficiary of this broken relationship is the marketing vendor community.

If you're a merchant, trump what those vendors do ... go buy your marketing friend a $49 prime rib meal or alder planked salmon meal or a salad or whatever ... and expense the meal, and see if you can rebuild your relationship with the marketing team. The marketing folks are getting a better deal from the vendor community than they're getting from the merchandising team.

Build a relationship.

I know, I know, you're a merchant and you want to know why the darn marketing folks won't make peace - why can't the marketing team take YOU out to dinner? I get it. They should take you out to dinner! But I've been in too many meetings where the merchandising team beats the living daylights out of the marketing team, to the point where the marketing team would do anything (i.e. spend time with vendors) than attend one more meeting with the merchandising/creative team.

Ok, fine. Both side are accountable. Both side should try to rebuild relationships. Have at it!

July 20, 2016

Ad To Sales Ratio

Ad-To-Sales Ratio is a thoroughly misunderstood metric, folks.

Here's a typical profit and loss statement for a business that is slogging through a tepid 2016.

Tell me what you observe?

This is a typical business ... 5% pre-tax profit, a whopper of an ad-to-sales ratio.

Let's assume this is a typical catalog brand ... where 75% of ad-dollars are paper-centric ad-dollars. Let's also assume that paper/printing/postage expenses are about equal. What happens?
  • Paper folks earn $7,500,000 cash from the operations of your business.
  • Printers earn $7,500,000 cash from the operations of your business.
  • The USPS earns $7,500,000 cash from the operations of your business.
  • You earn $5,000,000 from the operations of your business.
I know, I know, those folks have overhead too, so they'll say this is a biased analysis.

But the analysis is designed to point out why your vendor partners are so eager to grow their relationship with you. They get paid more from the operations of your business than you get paid.

And that's just not acceptable.

So when your vendor partner tells you to ignore various blog posts or says my modeling approach isn't aligned with industry "best practices" or tells you to mail more in response to an analysis where I show you can be more profitable by mailing less ... refer to the p&l above and ask yourself if your vendor partners generate more cash from the operations of your business than profit that you generate from your business?

July 19, 2016

Fair Compensation For Reactivation Products

We're inundated with reactivation opportunities ... search or email marketing or vendor overlays or social nonsense or mobile strategies ... somebody is always telling you what you have to do to be successful ... somebody who wants to be paid ... by you.

And too many of you listen.

Have you ever run a profit and loss statement on a vendor-hyped reactivation tactic? Have you ever looked at who gets paid?

Here's an example ... the vendor-hyped reactivation tactic actually works, so that's a blessing. But tell me what you see when you look at the profit and loss statement.

The RED number is how much the vendor gets paid for the tactic.

The GREEN number is how much you get paid for using the tactic.

Can you see why the vendor community loves this stuff? They get paid 6.6 times as much as you get paid for the tactic.

I know, I know, I can hear the vendor community howling as we speak ... "WE MADE YOU MORE PROFIT THAN YOU WOULD HAVE MADE WITHOUT OUR TACTIC". Yup, that's correct.

But come on!

Again ... the vendor is making 6.6 times as much cash as you are making ... your employees are working to make the vendor 6.6 times as much cash as the employees generate for your own brand.

And that's what happens when the tactic yields profit.

How about all the times when the tactic is not profitable ... which happens all the time!!? All those times your vendor tells you that you will make up the volume on lifetime value?

Any reactivation tactic should include a fair distribution of profit/cash. The vendor should not earn 6.6x as much as you earn. Ever.

July 18, 2016

The Reactivation Narrative

The reactivation narrative is sometimes filled with lizard logic.

Why?

Let's discuss some of the problems with the reactivation narrative.

Issue #1 = There Are Riches In Reactivated Customers!
  • For most of us, there aren't riches to be had when reactivating customers. I got to work at Lands' End, Eddie Bauer, and Nordstrom. When you have between four million and ten million twelve-month buyers, you also have an equal number of 13-60 month customers. So yes, there are riches to be had when working at Lands' End, Eddie Bauer, and Nordstrom.
  • But you don't work for Lands' End, Eddie Bauer, or Nordstrom. You work for Widget World. You have 250,000 13-60 month buyers. And only 10% of that audience is going to purchase again this year, if you are lucky. That's 25,000 buyers. When a vendor tells you that they have reactivation magic that improves reactivated buyer counts by 10% (and 10% is a big improvement, friends, this means your vendor did a good job), you increase your buyer count by 25,000 * 0.10 = 2,500 buyers ... your twelve-month buyer file might increase by 1% or 2%, that's it. At a $100 AOV, that's $250,000 demand. Do you want $250,000 demand? Absolutely! Did you achieve "riches" by mining your reactivation file for gold? Hardly. After expenses, you're lucky to take home $25,000 profit. Your vendor, however, takes home more profit than that.
Issue #2 = How Vendors Make Money.
  • For you, improved reactivation yields minor benefits.
  • For your vendor, a reactivation product is a major product ... this is how the vendor puts cheddar on the hamburger.
  • As a result, the vendor hypes the living daylights out of reactivation, and for good reason ... it's much more important to the vendor than it is to you!
  • When you run a p&l on reactivation tactics, it is common for the vendor to make more profit on the reactivation tactic than you make. Seriously! Run a p&l sometime and see for yourself. This is the problem with vendor hype ... the tactic is far more important to the health of the vendor than it is to you. That social media overlay pays dividends for the company offering the social media overlay.
  • Why should a vendor make more money off of your reactivation activities than you make? Seriously. Offer me a credible answer to that question.
Issue #3 = You're Already Speaking To Many Reactivation Candidates.
  • It isn't like your reactivation audience is ignoring you.
  • Half of the reactivation audience is on your email file, and you are "engaging" this audience four times a week, every week, all year long, 200 times per year.
  • If you are a cataloger, then you are engaging the rest of the reactivation audience "X" times per year with your beloved catalog.
  • There's a reason that a customer says no to 200 emails per year and 4 catalog per year, every year ... the customer doesn't want to buy from you!!!
Issue #4 = Discounts / Promotions
  • Some vendors demand that you use discounts / promotions in combination with their solution. They do this for a good reason ... it increases the likelihood that their solution appears to be successful. This is a lie told on behalf of the vendor. It means that you cannot separate the impact of their solution from the impact of the discount / promotion ... the vendor gets credit for reactivation purchases that are actually caused by discounts / promotions. You get a reduced gross margin percentage, and your merchandising team gets a smaller bonus payout as a consequence.
  • Worse, which customer is treated better ... the loyal buyer who visits your site and is not given a promotion to purchase, or the 44 month buyer who visits your site and is immediately given a 30% off plus free shipping offer to "tickle her buying bone"??
  • I've yet to run across a project where a customer is given a promotion and then becomes less likely to need promotions in the future. When you give a discount to a customer, the customer becomes more likely to purchase via discounts in the future. Congratulations! Your reactivation strategy just mucked-up the future profitability of your brand.
Issue #5 = Where To Spend Your Time
  • Repeatedly, I watch companies spend disproportionate time trying to convert lapsed buyers.
  • The biggest short-term payback comes from your 0-12 month file.
  • The biggest long-term payback comes from focusing on first-time buyers.
  • The biggest overall payback comes from having a robust merchandising assortment that causes customers to purchase.
  • Lapsed buyers represent the smallest short-term and smallest long-term payback.
  • In my simulations, the math always aligns with finding a new buyer. Always. Why? If you spend your incremental dollars finding new buyers, then you have a new 0-12 month buyer and you have your lapsed buyer that you are already emailing 200 times a year and sending 6 catalogs a year to ... it's not like you aren't speaking to the 30 month buyer ... you are already pummeling the living daylights out of that customer!
  • Always default to adding an incremental new buyer with your incremental time and incremental advertising dollars. My simulations repeatedly show that this is where you get the biggest bang for your buck.
I'm not saying you shouldn't work hard to reactivate lapsed buyers.

I am saying that you should ignore vendor-hyped lizard logic. Your lapsed buyer file isn't full of riches (unless you are a billion-dollar brand ... if you are, then vendor-hyped lizard logic works great for you, no doubt about it).

Now, if your vendor has a credible reactivation strategy and they are humble about what they bring to the table and both parties equally share in the profit of the situation, then by all means cling to that vendor like grim death!!!

July 17, 2016

Items Within An Ecosystem

Here's another common problem I run across.

If you run a department store (Neiman Marcus, Amazon), you tend to have product diversity that minimizes issues. But if you have maybe a couple hundred styles/skus, there's a danger in not understanding how key winners drive your overall ecosystem.

When you have three hundred items and maybe just fifteen winners, the fifteen winners disproportionately influence the whole business. 

And if just a few of those winning items cause customers to "lock-in" on those items, you have downstream trouble.

What you want is a winning item that causes customers to cross-shop the rest of your assortment ... and a winning item that causes customers to come back repeatedly.

If a winning item causes the customer to only buy the winning item ... and the winning item causes the customer to shop less frequently, then the winning item is actually hurting the long-term health of your business ... it is starving your ecosystem of future success.

This is where a marketing / merchandising partnership is critical. You want to have a marketing team that can explain these dynamics to your merchandising team. Your marketing team needs to be able to craft queries that explain merchandise/customer interactions.

July 14, 2016

Over-Emphasis

Here's what happens.
  • The merchandising team is given incentives to grow the business, especially among high-margin items, and they are given inventory turnover goals that preclude expansion of new items that may not sell well.
  • High-margin items, especially winning high-margin items, are given all of the primary real estate.
  • The number of winning items grows over time.
  • The number of contending items shrinks over time.
  • The number of new/contending items shrinks over time.
  • Within three years, the business is contracting, but the merchandising team is earning healthy bonuses.
  • Marketing gets yelled at ... the CMO is fired for "not targeting the right customers in an omnichannel world".
There's nothing wrong with paying folks for promoting high-margin items that turn often.

There is something wrong with not giving incentives for the development of items that will be successful in three years.

Try to avoid the over-emphasis of key items that yield bonus payouts. Offer balanced bonus structures that include the marketing team and merchandising team and creative team, and see what happens.

In other words, be a leader!

We're short on leaders.

Use your Merchandise Forensics framework to lead your organization down a good path.

July 13, 2016

Merchandise Differences Across Channels

Almost every Merchandise Forensics project illustrates channel differences that run opposite of what the "One Customer, One Brand, Many Channels" audience preaches.

We're told that in an Omnichannel world, we need to offer the same products at the same prices in every channel, coupled with a unifying story (#content, preferably #digital) that ties the whole thing together.

When you run a Merchandise Forensics project by channel, you immediately see fundamental differences in customer behavior ... differences that make it clear that each channel possesses customers with unique behavior.

Ever wonder why affiliate buyers have such low repurchase rates? Because they only purchase from the inexpensive spectrum of your merchandise assortment ... and they need a discount to purchase. Your paper-based strategy of full-price items is never going to work, ever, to this customer. Then you grumble that this customer has low lifetime value ... you caused this by having a robust affiliate marketing program!!

Email should be the voice of the brand, right? Instead, email is the voice of discounts and promotions (look at what companies do to non-cookied customers ... sign up for email and get 10% off ... who are you going to attract with this strategy?). Not surprisingly, only a subset of the customer base interact with email marketing, and their preferences are for inexpensive items tied to promotions. Analyze your email marketing metrics, and you'll think you are doing well. Analyze email performance via a Merchandise Forensics framework, and you'll be frightened by what you learn!!

Old-school catalogs tend to align with winning products ... keep going down that path, and the assortment gets stale and the customer audience ages ... this is a very common outcome.

Retail often aligns with newness.

From there, the results get messy. Each brand has a unique relationship with each channel (affiliates, search). Just be sure to analyze each channel.

On average, the biggest bang for the buck with new items comes in nearly-free digital channels like email. Instead of blasting out promotional messages, try praising new items at full price in email campaigns. You have 4-5 of these things a week, why not dedicate 1-2 of them to promoting new items instead of promoting promotions?

The key, of course, is to realize that each channel has modestly different customers with modestly different preferences.

You've been taught the exact opposite of what nearly ever Merchandise Forensics project illustrates. You've been taught that sameness wins. The data shows that unique merchandising approaches by channel is what wins.

July 12, 2016

Generating Enough New Winners

In most of my projects, companies do not do a good enough job of generating new items that become winning items.

Since writing the booklet, I've simplified my view on new items ... there are only three types of items.
  • Winners = Top 5% of Units or Top 5% of Demand.
  • Contenders = Next 40% of Items sorted on Demand Volume.
  • Others = All Other Items.
Using this framework ...
  • Winners are worth about 45% of annual demand.
  • Contenders are worth about 45% of annual demand.
  • Others generate about 10% of annual demand, but represent 55% of styles offered.
New items tend to go through a two-year development cycle.
  • The new item must become a Contender to have a chance in the future.
  • The Contender must become a Winner in year two.
Here's where the problem arises.

It is not hard, in these projects, to teach a company that there need to be 10 winning new items and 90 contending new items each year to fuel the future health of the business. If the company offers 400 new items per year, then 10 of 400 (2.5%) must become Winners, and 90 of 400 (22.5%) must become Contenders.

Let's say that a company wants to get 15 new Winners and 135 new Contending items, in order to fuel future growth. How might the company go about this?
  1. Do a better job of identifying Winners / Contenders.
  2. Have marketing promote potential Winners / Contenders more heavily.
  3. Increase total new items by 50% so that new Winners / Contenders grow by 50%.
Most companies should pursue (2) and (3), with (3) getting priority.

Most companies instead pursue (1) and (2), with (1) getting priority.

It is terribly hard to achieve (1) ... for if that line of reasoning were successful, most companies would already be successful at (1) and there wouldn't be a problem!

It is hard, HARD work to find new items that become winners. Really HARD work. I'd rather place my bets with a diversified portfolio of new items that yield more winning new items than to double down on finding more new / winning items off of the same quantity every year. At least that's what the project work suggests.

The Read and Reject audience, of course, thinks that you can just yell at merchants louder and get results. Doesn't work that way.