May 17, 2007

Missing Plan

If you really want to test your professional character, see what happens when your business starts missing plan ... by 45%.

Back in 2001, I was part of a new management team recruited by the esteemed Michael Smith (of Lands' End, Classmates.com and Bag, Borrow Or Steal fame). Our job was to fix Nordstrom.com, a division of Nordstrom that was posting hideous double-digit negative EBIT, year-after-year.

In our first four months, we experienced something that tests professionals who think they're brilliant. A business that was failing mightily began to miss expectations by more than twenty percent. In fact, one series of catalogs missed plan by forty-five percent. That means customers liked the catalog so little that they spent almost half of what they spent in a comparable catalog the year prior --- a year where double-digit negative EBIT occurred.

Here is what the results looked like, with numbers altered to protect the innocent:

Analysis Of Catalog Results














Rates
Plan
Actual
Circulation


4,000,000
4,000,000
Demand


$35,000,000
$19,250,000
Net Sales
71.0%
$24,850,000
$13,667,500
Gross Margin
52.0%
$12,922,000
$7,107,100
Less Book Cost


$5,000,000
$5,000,000
Less Var. Op Expense
11.0%
$2,733,500
$1,503,425
Var. Op. Profit


$5,188,500
$603,675


When your catalog misses expectations by nearly five million dollars profit (remember, numbers have been doctored a bit, to protect the innocent), folks begin pointing fingers at each other ... quickly! Your new merchandising expert blames the old administration. The old administration blames the new team. Your President suggests you don't know a thing about circulating catalogs.

After the finger pointing subsides, you have to get down to the hard work of planning next year's catalog. You use the catalog that completely failed as your planning base. Your circulation plan for the next year might look as follows:

Next Year's Plan
















Rates
This Year
Next Year
Circulation


4,000,000
1,600,000
Demand


$19,250,000
$10,900,000
Net Sales
71.0%
$13,667,500
$7,739,000
Gross Margin
52.0%
$7,107,100
$4,024,280
Less Book Cost


$5,000,000
$2,479,000
Less Var. Op Expense
11.0%
$1,503,425
$851,290
Var. Op. Profit


$603,675
$693,990

This is called "thinking inside the box". And it is damaging. You end up trimming circulation by more than half, to get rid of unprofitable names. By doing so, you only increase profit by about a hundred thousand dollars. And, you've made the business much, much smaller.

Actually, your customers are making your business much, much smaller, because they're voting with their pocketbook that they don't like you.

But this is where you get yourself in trouble, if you continue to "follow the rules". In other words, if you continue to circulate to a certain cutoff level, you are "certain" to run yourself out of business. You cut marginal names, the very names that will pay the freight in a year or two.

Missing plan by 45% requires you to re-think your business model.

In our case, many more members of the management team "left to pursue other interests, we wish them the best in their future endeavors".

A stable team of leaders "gelled". We "rightsized" the catalog business (fewer titles, fewer pages, fewer in-home dates, capitalize on e-mail and online marketing) A hideous profit and loss statement became one that any leader could be proud of.

You don't learn a lot when your channel is constantly growing by twenty percent, or thirty percent. You learn a lot about business, and about people, when your channel fails to meet plan by forty-five percent.

It will be very interesting to see what happens to today's online business leaders when the online channel begins to decline, an inevitability in the evolution of business channels.

2 comments:

  1. How on earth could a post this good not have any comments. I just spent an hour reading your blog, and every single post is outstanding.

    Perhaps you should post only twice a week to give your readers enough time to absorb and reflect on what you have written.

    This post is really about discovering Truth through failure. It's about the value of humility and how people can only become humble through self-immolation. Boy, what a great post -- and what a valuable lesson shared by someone with a first-hand perspective.

    Your blog is incredible. Perhaps a printed compendium of posts is in order. I keep waiting for the executors of Gary Halbert's estate to do the same with the Boron Letters ...

    Would that be a happy day?

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  2. Thanks for the nice comments, Harry.

    I've learned that my blog does not generate a sense of "community" in the way other blogs do.

    In some blogs, you can get 25 comments by asking folks to talk about the importance of CEO blogging, or how jetBlue might better respond to a crisis, or the important role of Twitter in the future of communications.

    This blog frequently goes silent, and I take that as a good thing. If I am getting too many comments, I'm probably not doing enough teaching.

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