February 28, 2007

Positive News: Multichannel Marketer Innovation

I'm going to start each month with good stories in the world of multichannel retailing. The good news could be about people, marketing activities, or strategies.

Here's a few things I noticed this evening on various multichannel marketer websites.

Ann Taylor has a nice "Trends" landing page. What I like is that Ann Taylor has a point of view about their merchandise. Ann Taylor competes in a very challenging market, with numerous direct competitors, and pressure from the high-end and low-end of the market. I like that they are trying to differentiate themselves from their competition.

L.L. Bean's homepage prominently features catalog requests and e-mail signup above the fold. When you have the type of traffic that L.L. Bean has, it is important to try to build a relationship with visitors. Bean is not shy about encouraging the random visitor to engage.

Visit the homepage of Urban Outfitters. Check out the upper right hand corner of the screen. If you don't have anything in your shopping cart, Urban Outfitters scribbles out the View Basket tab, circles the word "empty" on your shopping cart, and points an arrow to the cart. I visited the homepage, and noticed this immediately. Clever! Move your mouse along the links across the top of the page, and see what happens.

Gymboree has a survey on the homepage. Using the phrase "We Listen", they offer you the opportunity to answer four questions about what you think about their Easter line of merchandise. It would be fun to segment those who fill out the survey, and understand if the commenters are high-value customers, and then link that data to actual visitation, shopping cart, and purchase metrics.

At the top of Lane Bryant's homepage, you see two flags. If you are a Canadian visitor, you can click your flag, in order to see merchandise denominated in Canadian currency. It's always good to make your site friendly to our friends living north of the border.

Patagonia has the courage to publish a voluntary recall on their homepage.

Are there any multichannel retailers you would like to praise, multichannel retailers who are doing unique and innovative things?

Top Four Articles In February

Here are the four most popular articles from the month of February.

Number Four was the Neiman Marcus Fashion Week Blog. This received a lot of traffic. In fact, most times when I talk about how companies are using this style of communication, the post gets a lot of traffic.

Number Three was the Social Media Index for Apparel entry. This is something I may continue to update, given the popularity of the ranking system.

Number Two was Virtual CEO: Coldwater Creek and Inventory Management. You enjoyed reading this, but nobody left a comment as to how to solve the problem. The lack of solutions indicates jsut how tough it is to run inventory management at a multichannel business.

And finally, at Number One, we have The Grammys Of Mulitchannel Marketing. The most popular article of the month could have used more comments --- come on folks, use your chance to recognize somebody who does great work in the multichannel retailing environment!!!!!!

February 27, 2007

What Are The Real Multichannel Marketing Trends?

Say you work at a direct-to-consumer organization, like I do. You want to learn what is being talked about in the multichannel marketing industry. Your competitors won't talk to you, and other businesses are not particularly forthright with you.

So, you turn to trade journals, like DMNews, hoping to learn what is happening. You click on their Catalog/Multichannel Retail link, to see what folks are writing about.

I scanned the last twenty pages of articles categorized in the Catalog/Multichannel Retail section of DMNews. I categorized articles as follows:
  • Strategy and Innovation --- Example = Orvis announcing a loyalty program.
  • Business Results, Mergers, Acquisitions, Lawsuits.
  • Catalog Discussions
  • Vendor-Based Technology Solutions and Vendor-Based Consumer Studies
  • Hirings, Firings and Deaths
  • Conference Discussions
I studied more than 150 articles printed by DMNews. Here is what I observed:


Strategy and Innovation represent 33% of all articles. This is probably a good thing!

Business Results, Mergers, Acquisitions and Lawsuits represent 24% of all articles.

Catalog Discussions represented 17% of all articles. Most interesting about this is that fifteen of the seventeen articles were positive --- talking about catalog launches, how catalogs drive multichannel sales, how young readers like print, "green" initiatives, you name it. The only negative articles were about Home Depot dropping their catalog titles.

Vendor-Based Solutions and Vendor-Based Studies represented 13% of all articles.

Hirings, Firings and Deaths represented 8% of all articles.

Conference Discussions represented 5% of all articles.


Of interest to me is the amazing skew toward catalog discussions being positive. Any of us in the multichannel marketing industry know catalog is in utter free-fall, quickly becoming the fossil of the marketing toolbox. That being said, almost all of the articles DMNews wrote about catalogs were positive.

Three questions for you, the loyal multichannel marketing executive who reads this blog.

First, does the mix of articles represent the mix of content you want to read?

Second, it is better for a publication like DMNews to focus on what is really happening, or should it focus on positive stories, success stories? Should it encourage the multichannel marketer at a time when catalogs are in free-fall, or reflect reality?

Third, how can a publication like DMNews (or this blog) get actual feedback from actual employees who don't work in the vendor community? How does a publication get real, honest feedback about what is happening?

Your comments?

February 26, 2007

Mistakes

My wife had a problem with a furniture order --- a refund due for the past eighteen months had not been sent to her.

We all think we do a really good job, and don't make many mistakes. So naturally, we call out all the problems we run into, when dealing with 'brands'.

Assume you make a big mistake once every 100 days, maybe just three big mistakes per year.

If you are an independent consultant or a pundit, you'll be right almost every day. Read a few blogs, you'll notice this fact immediately. Pundits have a solution for every large, dumb company in America.

Now pretend you work for a large, dumb company in America, one that has 20,000 employees. Let's say that these are great employees, and they only make a mistake once every 125 days. That's only 2.88 big mistakes per employee per year.

On average, this behemoth of a brand will make 20,000 * 2.88 / 365 = 158 big mistakes each day.

158 big mistakes, each day.

I suppose it's how you respond to big mistakes that sets apart good companies from not-so-good companies.

But let's not fool ourselves that we have some magic potion that fixes the ills of a large, dumb company. It isn't easy to get 20,000 or 50,000 or 200,000 employees to be close to perfect, on every issue, every day.

It is relativly easy to get one person to be close to perfect, on every issue, every day.

Costco Returns

KING5 News reported that Costco altered the return policy on electronic merchandise (iPods, HDTV televisions etc.).

Previously, a customer could return an iPod anytime after purchasing the item.

Due to rampant fraud, Costco changed the return policy to a 90 day window.

Is this an acceptable compromise, or is this a greedy company protecting razor-thin gross margins?

I think this is an acceptable compromise.

February 24, 2007

Cannibalization in the Online Channel

Earlier today, we discussed cannibalization in the catalog and e-mail marketing channels.

Cannibalization is easy to detect in advertising channels. Cannibalization is more challenging to detect in the online channel.

In e-commerce, few business leaders are willing to sacrifice sales by shutting down a website, or various merchandise divisions within a website.

As a result, we need a different tool-set for detecting if cannibalization is happening in the online channel. One way to do this is by using Multichannel Forensics.

Let's assume you sell hardware on your website. You carry three drill brands, Milwaukee, DeWalt and Skil. Management decides to carry a fourth brand, Makita. Management is concerned that Makita may cannibalize the sales of the existing brands.

One way to see what is happening, early in the process of selling Makita drills, is to look at clickstream data.
  • Step 1 = Identify which customers viewed Milwaukee, DeWalt, Skil and Makita drills during the first month that Makita drills are available. In a spreadsheet, create four columns, one for each brand. Put a "1" in the cell if the customer viewed that brand of drill, otherwise, put a "0" in the spreadsheet.
  • Step 2 = Repeat Step 1 for the second month that Makita drills were sold.
  • Step 3 = Instead of looking at Repurchase Rates, look at "Revisit Rates" --- in other words, what percentage of customers who viewed a brand last month viewed different brands this month. Use the tools and techniques in the Multichannel Forensics PDF file to compute the appropriate calculations.
Let's assume your table migration probability table looks as follows:

Repurchase Index Portion of the Migration Probability Table











Milwaukee DeWalt Skil Makita
Milwaukee 88.0% 52.0% 16.0% 8.0%
DeWalt 33.0% 79.0% 18.0% 11.0%
Skil 14.0% 23.0% 83.0% 31.0%
Makita 10.0% 14.0% 36.0% 74.0%


Remember, there are three modes we want to understand.
*** Isolation = Repurchase Index Between 0% and 19.9%.
*** Equilibrium = Repurchase Index Between 20% and 49.9%
*** Transfer = Repurchase Index Greater or Equal To 50%.

Transfer is the most likely situation to indicate that significant cannibalization is occurring.

Let's analyze the table. Milwaukee drills are in equilibrium with DeWalt, and are in isolation with Skil and Makita. The Makita brand is not cannibalizing Milwaukee drills.

DeWalt visitors transfer viewership to Milwaukee, and are in equilibrium with Skil. The Makita brand is not cannibalizing DeWalt drills.

Skil visitors are in equilibrium with Makita. This means the potential exists for Skil customers to defect to Makita.

Makita visitors are in equilibrium with Skil. We conclude that there is competition for the customer's wallet between Makita and Skil.

After several months, the analysis would switch from an analysis of visitors, to an analysis of purchasers. Any situation where transfer occurs suggests the potential for cannibalization.

In e-commerce, we need to look at visitation and purchase data, and infer cannibalization via use of Multichannel Forensics. There are other ways to do this, however, Multichannel Forensics provides a good framework for considering whether cannibalization is truly happening.

Cannibalization in E-Mail Campaigns

Here's a quick question for those of you who are e-mail marketing experts. Can you articulate the incremental value of your e-mail campaigns?

Oh sure, you can easily articulate the open rates, click-thru rates, conversion rates, and demand per e-mail that you drive to your online channel.

But can you actually determine if the sales you are saying you drove actually happened because of the e-mail campaign, or would they have happened anyway, if no e-mail campaign occurred?

Here's something for you to try.
  • Take a random sample of e-mail subscribers.
  • Divide that sample in half.
  • The first half receive all of your e-mail campaigns for a month.
  • The other half receive no e-mail campaigns for a month.
At the end of a month, produce the following table:


Received All Did Not

E-Mail Blasts Receive E-Mail
Customers 100000 100000
Total E-Mails Sent 400000 0
Open Rate 25.0% 0.0%
Click-Thru Rate 35.0% 0.0%
Conversion Rate 3.0% 0.0%
Average Order Size $125.00 $0.00
E-Mail Demand $131,250 $0
Non E-Mail Demand $175,000 $250,000
Total Monthly Demand $306,250 $250,000


This is an analysis that must be done for all e-mail marketing programs.

This analysis suggests the following:
  • When you send e-mail campaigns to this customer segment, you'll get $131,250 of e-mail demand, and $175,000 of non e-mail demand, for a total of $306,250.
  • If you do not send any e-mail campaigns, customers increase their non e-mail demand from $175,000 to $250,000.
  • Therefore, e-mail campaigns did not truly drive $131,250 of demand. Instead, e-mail campaigns actually drove $131,250 - ($250,000 - $175,000) = $56,250.
  • Only $56,250 / $131,250 = 43% of the e-mail demand you are recording in your reporting is truly incremental. The remainder of the demand is being cannibalized from all of the other online orders you would generate.
Few e-mail pundits take their analyses to this level. They harp on the relationship-building value of e-mail campaigns, the value of click-throughs and conversions.

Our industry needs to incorporate analytical discipline to e-mail marketing strategies. By taking a page out of the catalog analyst's tool-kit, we can better understand the true value of our e-mail marketing activities.

Cannibalization in Catalog Mailings

In a recent post, I talked about measuring the incremental value of the catalogs sent by independent business units, during my tenure at Lands' End.

The topic of cannibalization is easily illustrated in the catalog world. Let's assume a cataloger had two mailings last February. This February, the multichannel retailer wanted to execute three catalog mailings. Each mailing is sent to 500,000 customers. The circulation director executes a test. One segment of customers receives all three catalogs, while another identical segment of customers receives just two catalogs.

The segment that received two catalogs performed as follows (results grossed-up to full circulation of 500,000).
  • Catalog #1 = $4,000,000 demand via the telephone and online channel.
  • Catalog #2 = Not Mailed
  • Catalog #3 = $4,000,000 demand via the telephone and online channel.
  • Total Demand = $8,000,000. Total Book Cost = $1,000,000. Demand to Profit Rate = 25%. Net Profit = $8,000,000*0.25 - $1,000,000 = $1,000,000.
The segment that received three catalogs performed as follows (results grossed-up to full circulation of 500,000).
  • Catalog #1 = $3,200,000 demand via the telephone and online channel.
  • Catalog #2 = $3,200,000 demand via the telephone and online channel.
  • Catalog #3 = $3,200,000 demand via the telephone and online channel.
  • Total Demand = $9,600,000. Total Book Cost = $1,500,000. Demand to Profit Rate= 25%. Net Profit = $9,600,000*0.25 - $1,500,000 = $900,000.
Testing of this nature is important. In the two-book scenario, we get less demand, but we actually get more profit. In the three-book scenario, demand increases in total. However, not enough demand is actually generated to cover the cost of the additional mailing.

Multichannel merchants seldom have the reporting available to measure this phenomenon. Your SAS programmers can measure this for you.

In this case, the additional catalog deflated performance of surrounding catalogs by twenty percent. The two original catalogs lost $1,600,000 volume due to the addition of the third catalog.

On an incremental basis, the third catalog is generating $1,600,000 / $3,200,000 = 50% incremental volume. Half of the volume is truly additive, half is cannibalized from surrounding mailings.

The profit and loss statement for the incremental catalog looks like this:
  • Catalog #2 = $1,600,000 incremental demand via the telephone and online channel.
  • Total Demand = $1,600,000. Total Book Cost = $500,000. Demand to Profit Rate = 25%. Net Profit = $1,600,000*0.25 - $500,000 = ($100,000).
The reporting that the finance folks see does not illustrate this fact. Finance reporting illustrates three catalogs that generated $3,200,000 each, with each book driving $300,000 profit.

This is the bridge that you have to cross. You have to somehow convince folks that your reporting is the 'real' story, that the second catalog is truly unprofitable. This is not an easy bridge to cross.

When building a catalog contact strategy, you have several important questions to ask yourself.
  • What is the purpose of the catalog? To drive telephone sales? To drive online sales? To acquire new customers? To increase profit? To simply advertise your brand? You catalog strategy must be executed on the basis of your objectives. If you want to simply advertise your brand, go ahead and take a lot of risks --- but don't expect great sales results to happen.
  • Are you willing to lose money, in the short-term, to build a customer file that generates profit long-term? In the example above, you do get $1.6 million of incremental volume, volume that helps build a customer file that drives future profit.
  • How many catalogs should you mail? Do you have the right tests in place to understand the right number of mailings? How many mailings should be sent, by customer segment?
  • Do your catalogs truly drive online sales, or does you matchback vendor overstate the importance of catalog? This question is very important. The statement "60% of our online sales come from customers who received a catalog" is meaningless. The statement "Catalogs drive 20% of total online volume" is meaningful. We hear the first statement quoted all the time. We seldom hear the second statement --- that statement is the important one.

Friends of MineThatData: February 24, 2007

Most sites in this month's Friends of MineThatData rankings improved their metrics, building audience and community during the month of February. Good job!

The three big movers this week are Customers Rock!, Jim Novo's Marketing Productivity Blog ,and Ron Shevlin's Marketing ROI blog. Congrats to all three authors for building an audience.

You, too, can be included in the Friends of MineThatData rankings by doing the following:
  • Host a blog that focuses on Database Marketing, ROI, Web Analytics, Direct Marketing or Customer Behavior.
  • Focus on writing content that is largely positive.
If you feel your blog meets the criteria mentioned above, send me an e-mail with a hyperlink to your blog.

Here are the top ten blogs --- see the right sidebar for all Friends of MineThatData.

1st Place = Occam's Razor, 6.7
2nd Place = Customer's Rock, 4.6
3rd Place = LunaMetrics, 4.5
4th Place = Juice Analytics, 3.8
5th Place = Rimm-Kaufman Group, 3.0
6th Place = Sports Marketing 2.0, 2.6
7th Place = Jim Novo's Marketing Productivity Blog, 2.2
8th Place = Profitable Marketing, 1.7
8th Place = Marketing ROI, 1.7
10th Place = Business Enterprise Management, 1.5
10th Place = Data Mining Research, 1.5

February 22, 2007

Leaving Lands' End

Today, I stumbled across a Powerpoint presentation I gave at Lands' End, back in the embryonic stages of a thing called the internet.

The 1994 presentation outlined the impact of mailing numerous, small, targeted niche catalogs to customers. From mid-1993 to mid-1994, our list processing experts correctly executed 128 simultaneous, annual holdout tests, impacting ten percent of our housefile. Using experimental design techniques that would make Ph.D. statisticians at Kansas State University proud, we were able to understand how much incremental sales we could generate by mailing an increased number of targeted mailings.

We were able to demonstrate that a customer began to 'tire' after receiving a catalog more frequently than every eighteen days. Each additional catalog we mailed to the customer drove less and less incremental sales. Eventually, we put too pressure on the customer's wallet. Instead of spending more, she began to allocate her dollars, proportionately, across the catalogs we mailed.

At the time, each business unit determined their own catalog contact strategy. There was not a lot of coordination between business units. If a customer recently purchased a turtleneck from our monthly catalog, each business unit immediately mailed the customer a targeted merchandise catalog, because this customer was a 'recent' buyer, a great prospect for their merchandise offering.

Our year-long test "suggested" that a centralized, coordinated circulation effort could generate more profit (though it would result in a decrease in sales) than allowing each business unit to determine their own circulation strategy.

In October and November of 1994, we presented our findings to management. I recall spirited debates, and for good reason. If you were the Vice President responsible for running a business unit, and some dweeb in the circulation department suggests he control your marketing strategy, you might elect to lash out at him!

Late in November 2004, our circulation team was gaining momentum on the opportunity to have centralized control over the catalog marketing strategy. I recall a raucous Christmas party on a Friday evening, where we celebrated our success with a veritable plethora of alcoholic beverages, mixed with a heavy dose of arrogance. All seemed good in the world.

We recovered from our weekend, and arrived to a new work landscape on Monday morning. Within a half hour, we were informed that Bill End, the CEO of the past several years, and in my opinion a friend of our work, was being replaced by a gentleman named Mike Smith, the current President of Bag, Borrow or Steal. Mike was previously the leader of one of the business units that had control over it's own catalog marketing strategy.

No single inflection point in my career impacted me more than this one. Within days, our circulation director was asked to run the Kids division. A person outside of our circulation team, with little or no true circulation experience, was promoted ahead the existing managers in our department. He became our new boss. He was a good, bright person --- but not the person we anticipated would succeed the prior leader.

In my case, I lost all but one of the analysts I had reporting to me, as they were assigned to marketing teams responsible for driving the circulation strategies of their own merchandise divisions. A centralized strategy would not happen in 1995.

Within two weeks, I went from feeling like a hero, to feeling like a zero.

Eleven months later, I would follow a former Lands' End manager to Eddie Bauer. I was leaving Lands' End.

I have yet to work in an environment that was as stimulating as the one at Lands' End during the final six months of 1994. Many of the individuals working in circulation at that time have gone on to do great things. Many more have gone on to be great people.

The best lesson I learned from that experience involves the concept of being "right". As a mid-level manager at a billion dollar company, I strongly believed that I was "right", that I had a strategy that would improve our profitability, that all needed to bow down to the brilliantly conceived strategy of an arrogant twenty-nine year old.

Being "right" means very little. Articulating a strategy that allows everybody to benefit, personally and professionally, means everything. Not many of us are able to pull off the latter.

Within six short months, I learned everything I needed to know about office politics, marketing strategy, autonomy and empowerment, the use of analytics in decision making, and the great impact one single inflection point can have upon a person's career.

Your turn --- is there an event that happened in the course of your career that impacted you, professionally and personally? If you experienced such an event, what did you learn from the experience?

February 21, 2007

Orvis Rewards --- Is It Rewarding For Orvis?

DMNews reported that Orvis began a new Rewards Visa program for Orvis cardholders. The program offers free standard shipping, as well as a $25 reward for every $500 spent at Orvis (or $2,500 spent on the card at other retailers).

Rewards programs are tricky to manage. From the standpoint of a business, program managers need to give away just enough merchandise to increase customer spend --- yielding more profit than expense. From the standpoint of the customer, the business needs to provide a genuine incentive that sets it apart from the competition.

The numbers at the end of this article are not specific to Orvis. But they clearly illustrate a challenge with Rewards programs. Using simulated sales, margin and expense metrics, the simulated example indicates customers need to spend at least forty percent more in order to cover the costs of a rewards program. Again, the numbers are not specific to Orvis, they are for illustrative purposes only.

Another interesting quandary with rewards programs --- the better the business manages line items in the profit and loss statement, the easier it is to generate profit, and therefore, it is easier to pay for a rewards program. Businesses that mis-manage the profit and loss statement require a greater increase in customer loyalty to pay for the rewards program.




Current Rewards
Orders
3.0 4.4
Average Order Size
$167.00 $167.00
Demand
$501.00 $734.80
Net Sales 80.0% $400.80 $587.84
Gross Margin 50.0% $200.40 $293.92
Less Marketing Cost
$0.00 $12.50
Less Pick/Pack/Ship 20.7% $82.94 $121.65
Add Shipping/Handling $12.95 $38.85 $0.00
Variable Operating Profit
$156.31 $159.77

An Open Letter To The Marketing Blogosphere

Dear Marketing Blogosphere,

When I began writing my blog last August, I looked to all of you to understand how this form of communication worked. I subscribed to most of the blogs in The Viral Garden Top 25 list. I subscribed to Marketing Profs Daily Fix. I checked out many of the blogs in the Z-List and the Power 150.

I learned a lot! At one point, I maintained nearly 200 blogs in Google Reader.

Yesterday, I unsubscribed from two more blogs, reducing my total to less than 150.

Why have I unsubscribed from so many blogs? Because we can be a very negative group of writers. I am equally guilty of this. But I'm growing tired of reading constant, non-stop, "I am better than you" criticism.

The great jetBlue crisis of 2007 represents a tipping point for me. Hundreds of jetBlue customers were imprisoned on airplanes for up to eleven hours last week. Thousands of families, travelers, and business associates were also inconvenienced.

According to Google Blogsearch, more than 7,500 articles have been written about jetBlue in the past seven days.

The marketing blogosphere has been particularly vocal. Many of us criticized jetBlue for gross incompetence. Many of us offered suggestions on how they can remedy the situation for those impacted. Many of us hammered them for being just another big, impersonal business that doesn't care about customers. Many of us suggested they use their own blog, or YouTube, to communicate with us. And when they did decide to use YouTube to communicate with us, some of us blasted them for not apologizing, for not doing a good enough job of communicating, for not better leveraging their own blog. Could they have done anything that met our expectations?

Why do we act like this?

Are we writing all of this commentary because we genuinely care about the "jetBlue brand"?

Are we writing all of this commentary because we genuinely care about the employees at jetBlue, especially the 95% of employees who had nothing to do with this incident?

Are we writing all of this because we are loyal jetBlue customers, and we don't want this to happen to us in the future?

Are we writing this because the businesses we work for are perfect, and never make mistakes?

Are we writing all of this to demonstrate our subject matter expertise in managing large companies, crisis situations, or use of social media?

Are we writing all of this because we are so fed up with corporate America that we simply can't take it anymore?

We wonder why our craft hasn't been embraced faster by brands. Why would any brand want to jump into this tank of sharks? A brand can work on being authentic, honest, responsive. A brand can work on communicating better. A brand can fess up when it makes mistakes.

A brand doesn't have to participate in a craft that is fueled by such negativity.

I would like to initiate a change in how the marketing blogosphere behaves. Starting March 1, I would like for the marketing blogosphere to write something positive.

Just one day a month, on the first day of the month, write something positive. Call it "One Positive Day". On the first day of each month, let's all identify one brand, one person, one "anything" that has done an outstanding job, and let's feature that story by writing about it.

On each remaining day of the month, do whatever you have to do. But on the first day of each month, let's try something different. Let's highlight something good, let's spread something positive.


Are you with me? Or are you comfortable waiting for the next brand to implode, so you can blast them in front of your audience?

Sincerely,
Kevin Hillstrom
The MineThatData Blog

February 20, 2007

E-Commerce "Power" And Web Analytics

How 'powerful' is your e-commerce website?

In other words, does your website have enough recent visitors and purchasers to fuel the growth of your business?

'Power' is an area that web analytics tools and web analysts usually fail to consider when performing their valuable job function.

'Power' is simply an expectation of how productive your e-commerce website will be this year, based on last year's performance and this year's visitor counts.

Let's review a very simple example of E-Commerce 'Power'.

Step 1: Segment your January 2006 website visitors as follows:
*** Segment 1 = Any customer who purchased online in January 2006.
*** Segment 2 = Any visitor who did not purchase, but visited 3+ times in January 2006.
*** Segment 3 = Any visitor who did not purchase, but visited 2 times in January 2006.
*** Segment 4 = Any visitor who did not purchase, but visited 1 time in January 2006.
*** Segment 5 = Any visitor who did not visit in 1/2006, did visit 1+ time from 2/2005 - 12/2005.

Step 2: Once you have segmented your file, take the mean of online spend in February 2006 for each visitor/cookie in Segments 1-5.

Your analysis should look something like this:


Segment 1 = 15,000 January 2006 Buyers, Spending An Average Of $25.00 in February 2006.
Segment 2 = 50,000 January 2006 3+ Visits / No Purchase, Spending $9.00 in February 2006.
Segment 3 = 125,000 Jan-06 2 Visits / No Purchase, Spending $5.00 in February 2006.
Segment 4 = 1,000,000 Jan-06 1 Visit / No Purchase, Spending $2.00 in February 2006.
Segment 5 = 10,000,000 Feb-05 to Dec-05 1+ Visit, No Purchase, Spending $0.50 in Feb 2006.

Multiplying customers by average spend, then summing across five segments, yields $8,450,000 of demand generated on the website, during February 2006.

You are now ready to calculate your E-Commerce website's 'Power'. You need just one more step to complete the analysis.

Step 3 = Replicate Step 1, but instead of using January 2006 as your timeframe for segmentation purposes, advance your timeframe by one year for each segment. This reflects your website customer file, as it exists today.

Step 4 = Multiply this year's customer counts by last year's average spend. This gives you an expectation for how much existing customers and visitors will spend this year, if all other conditions are the same. Here is an example of the resulting analysis:

Segment 1 = 22,000 January 2007 Buyers, Spending An Average Of $25.00.
Segment 2 = 55,000 January 2007 3+ Visits / No Purchase, Spending $9.00.
Segment 3 = 135,000 Jan-07 2 Visits / No Purchase, Spending $5.00.
Segment 4 = 1,100,000 Jan-07 1 Visit / No Purchase, Spending $2.00.
Segment 5 = 14,000,000 Feb-06 to Dec-06 1+ Visit, No Purchase, Spending $0.50.

Multiplying customers by average spend, then summing across five segments, yields $10,920,000 of expected online demand during February 2007.

We've finally made it to the 'Power' calculation.

Power = This Year's Expected Demand / Last Year's Actual Demand.

Power = $10,920,000 / $8,450,000 = 1.292.

We did it!! Your portfolio of online purchasers and visitors are 29.2% stronger than last year. You should expect existing buyers and visitors to spend 29.2% more this year than last year, all things being equal.

In an ideal online environment, the web analytics folks will run this analysis for you at the start of the month, and communicate E-Commerce 'Power' to the executive team in the early stages of each month.

Multichannel CEO/CMO Takeaway: It is time to expect much more out of your web analytics team. Standard web analytics tools do a great job of telling you what happened during an individual session. Standard web analytics tools do a poor job of predicting the future. Leaders need to know what will happen in the future. Partner with your web analytics team on this simple segmentation exercise. You and your analytics folks will be able to forecast business problems before they happen.

During the next few years, we will hit a point where the online channel stops growing rapidly. Leaders need to be the first people to know that a demand shortfall is coming. Beat your competition to the punch by reacting to your E-Commerce 'Power' Analysis.

February 19, 2007

Working At Very Large Corporations

How many of you work for large corporations?

I spent seventeen of my nineteen professional years working for companies that sold at least a billion dollars of merchandise on an annual basis. As a result, I am probably a 'big company guy'.

Back in 2000, I spent ten months working at an internet advertising startup called 'Avenue A' (now called aQuantive). Within two week of being hired, I worked on a small team of four people. We created a product that we took to market just six weeks later. No red tape, no approvals, just a small company allowing a small group of individuals to use their experience and best judgement.

Compare that experience to things that happen in large companies.

During my time at Eddie Bauer, I was Director of Circulation. This meant I was theoretically responsible for determining the best way to determine how to mail customers catalogs. My job was to maximize sales and profit by determining an optimal catalog contact strategy.

In 1998, I wanted to add a catalog to our contact strategy. I determined who the target audience would be in this additional catalog mailing. I determined how many pages should be in the catalog. I determined the merchandise composition of the catalog. I determined the in-home date for the catalog. I calculated the expected net sales, profit, and ROI of this endeavor.

To get this decision approved, I had to do the following:
  • My boss, the Divisional Vice President of Marketing, had to approve of my idea. He could alter the page count, merchandise composition, or in-home date. He could approve, alter or kill the idea.
  • If approved, the Sr. Vice President of Marketing had to approve of my idea. He could alter the page count, merchandise composition, or in-home date. He could approve, alter or kill the idea.
  • If approved, the Executive Vice President of Global Brand Direction had to approve of my idea. He could alter page count, merchandise composition, in-home date, and suggested creative presentation. He could approve, alter or kill the idea.
  • If approved, I had to pass the idea past the Director of Inventory Management. She had to support the sales plan by making sure that merchandise would be available. She could alter page count, merchandise composition and page count. She could alter or kill the idea.
  • If approved, I had to pass the idea past a team that I participated on, a team that focused on maximizing the catalog strategy. Our internet marketing leader, finance leader, operations leader, creative leader, and inventory leader could all alter the page count, merchandise composition, page count, in-home date, or creative execution. This team could approve, alter or kill the idea.
  • If approved, I had to pass the idea past the Executive Management team --- a team of Executive Vice Presidents, and our President/CEO. This team could alter page count, merchandise composition, in-home date, and suggested creative presentation. This team could approve, alter or kill the idea.
Assuming that I didn't have to go back to the drawing board and re-work my numbers, the idea, altered and morphed based on the feedback of numerous leaders, became policy.

Policy meant that many employees learned this idea was likely to happen. If powerful employees were opposed to the idea, they could lob the project back to any of a number of executives, who could begin the approval discussion process anew.

This process of iteration either resulted in a final decision, or resulted in the death of the project. Occasionally, there was not enough time to implement the idea, resulting in the death of the project.

Many big companies have better decision making processes than this. Many big companies have sub-standard decision making processes.

We wonder how big companies like JetBlue can completely ruin seven spotless years of brand equity with one day of bad mistakes. We wonder how Microsoft fails to compete with Google, or Apple, or a myriad of competitors. We wonder how Ford and Chevy implode when faced with foreign competition. We question why Dell plunders its brand heritage at a time when it needs to consider a viable online strategy amid significant competition. We wonder why record labels are busy destroying the music industry.

I have yet to work for a company led by 'dumb people'. It seems that problems occur when a bunch of smart, strong business leaders experience conflict, and are required to maintain sales and profit growth.

The self-organizing processes that occur when decisions need to be made become part of the culture of a large organization. Eventually, the culture becomes inflexible. The business struggles to be able to right itself, and focus on the change needed to survive.

I cringe when a pundit suggests that companies don't have the guts to ask questions. I have yet to work for a business that didn't have the guts to ask tough questions, or to make changes. That being said, every big company struggles to overcome a culture that formed over a long series of good decisions that led to successful business results.

Do you work at a large company, or a small company? Have you experienced the challenges I described in this article? What have you done to overcome these challenges?

Neiman Marcus Event Marketing And Google

Multichannel marketers face considerable challenges in using the online channel to manage brand image and promote their own marketing activities.

Do this simple Google Search: Neiman Marcus Event Marketing

A person who is interested in this topic finds the Neiman Marcus website listed at the bottom of the first ten results. More problematic for Neiman Marcus is that my blog is listed sixth.

Of course, Neiman Marcus pays for their brand name, and is prominently listed in the paid search section of the page.

Multichannel CEOs and CMOs: If Kevin Hillstrom at The MineThatData Blog can outperform your megabrand on simple search terms like Neiman Marcus Event Marketing, you have problems you need to address:
  • Take ownership of your brand. A good way to do this is to have staff write content that is search friendly, so that your customers will find your website when they search Google. Too much energy has been spent on e-commerce --- this energy caused us to not focus enough on owning our brand. The solution could be to follow Google's rules, and manipulate them for your own benefit.
  • Is Google your friend or foe? In this case, Google's algorithm somehow finds me more relevant than the brand equity Neiman Marcus spent decades building. Google likes you if you follow their rules. What is your plan for addressing Google's partial ownership of your brand, especially going forward? What do you do when Google gets bigger, and more influential? Do you trust a partner that ranks The MineThatData Blog higher than your own website?

February 18, 2007

Measuring Community

These days, many folks are trying to understand how to measure 'community'.

I thought it might be fun to explore the development of a "community index", using the statistics from my website.

You can download the community index spreadsheet here. Only change cells that are shaded yellow.

For those of you who want the details behind the spreadsheet, read the appendix of this article.

For the rest of you, here's the Executive Summary:

  • Community can be measured, trends can be understood.
  • In the case of my blog, I had a better "community" in October and November, when my audience was small, but comparatively vocal.
  • In December, my visits went way up, courtesy of Google. This hurt my "community index", because these visitors only came to the site to find specific information. Increased visitors did not translate to increased comments, or a significant number of visitors coming via an RSS-reader referring URL.
  • In January, my "community index" tanked. I had a barrage of visitors courtesy of Reddit. Those visitors largely viewed just one article. As a result, I didn't grow my "community".
  • My February results are extrapolated to represent a full month. Notice that I grew my base of folks who visit from a referring URL of an RSS reader. I gained a significant number of people who type in my URL. My search visitors have plateaued. But the number of comments have stagnated. Because comments have stagnated while visits increased, my "community index" is nowhere close to where it used to be.
It becomes clear that metrics can be created to illustrate how community can be measured.

In the case of my blog, the "community index" I developed is consistently declining. As my audience grows, the larger audience is less engaged with my blog.

These concepts translate well to e-commerce. Brands can pick a series of metrics appropriate for their business, and measure how engaged their customers actually are. Might any of my web analytics readers be willing to take a shot at an e-commerce version of this?

What do you think, folks? Is there any validity to this style of measurement?


Appendix:

Row 4: Enter the number of posts you wrote in the past month.

Row 5: Enter the number of comments you received in the past month.

Row 6: Comments per 1,000 visitors are calculated. This is a good way of understanding how many comments you are getting, given the varying amount of traffic you have.

Row 7: Enter the number of visitors that came from a referring URL of an RSS reader. I chose this route because not everybody uses Feedburner. In addition, it doesn't really matter how many folks subscribe to your feed. What matters is how many people choose to visit your site because they liked what they saw in their RSS reader.

Row 8: Enter the number of people who visited your site by typing in your URL. These visitors should be more loyal than others, given that they are willing to type your URL.

Row 9: This is a calculation --- it basically represents all other site visitors, and ultimately measures the number of folks who came to your site via a referring URL. These visitors should be more valuable than those who visit your site via search.

Row 10: Enter the number of people who visited your site due to a search (Google, Yahoo!, MSN, etc.). These should be the least engaged of any of your visitors, and will consequently count less when measuring community.

Row 11: Enter the number of pages viewed. The algorithm gives extra credit to visitors who view more than one page. If page views are truly becoming meaningless, then this algorithm will help, because I am only counting page views as a small percentage of the total score.

Row 12: Enter the total number of actual site visitors.

Column H: This is an adjustment column. If you don't like my weighting scheme, you can adjust it here. If you want to discount page views by half, change the adjustment value of "1.00" to "0.50". If you want RSS visitors to count twice as much, change the adjustment value of "1.00" to "2.00".

Column I: You don't adjust this column, you manipulate it by changing values in Column H. However, this column is ultimately what drives the measurement of community.

  • 50.00 points are awarded for each comment per 1,000 visitors.
  • 2.50 points are awarded for each visitor who comes from an RSS reader.
  • 1.00 point is awarded for each visitor who types in my URL.
  • 0.65 points are awarded for each visitor who comes via a referring URL.
  • 0.25 points are awarded for each visitor who comes via a search engine.
  • 0.05 points are awarded for each additional page (beyond the first page) that a visitor views on your site.
The spreadsheet multiplies values you enter by your adjustments, and my point scheme, to arrive at "community points". Community points, divided by visitors, yields the "Community Index".

What do you think?

February 16, 2007

Half Of Wikipedia Traffic Comes From Google, According To Hitwise

How would you feel if half of your brand were controlled by one entity?

Is Wikipedia valuable? Did Google hijack half the value of the Wikipedia brand? Or did Google double the value of the Wikipedia brand?

I wouldn't be comfortable with a situation where half of my traffic came to me because of a gatekeeper who I didn't have any control over.

Thanks to the folks at Hitwise for the information.

By the way Google, thank you for driving a full one-third of my daily blog traffic, and about sixty percent of my RSS readers courtesy of Google Reader. Thank you for managing more than one hundred and fifty of my favorite RSS feeds. Thank you for being my primary search engine of preference. Nope, Google isn't controlling my life.

The MineThatData Honor Roll: February 16, 2007

Several articles caught my attention during the past week.

DMNews talks about happenings at the eTail conference. Pay attention to the comments from Jodi Watson at Williams Sonoma. Over the next few years, you are going to see a separation between the concepts of "e-commerce" and "website". The website will become the primary marketing tool for a multichannel retailer --- it will be an indispensable tool for marketing retail brands. I really believe a skillset will emerge, people will finally learn how to utilize a website to maximize retail sales, not just e-commerce sales. These are the folks who will drive our multichannel businesses in 2012 and beyond.

This story in CRMBuyer, written by Denis Pombriant, illustrates one of the biggest failures of "CRM" systems, and highlights the future of analytics. Our industry spent so much time collecting purchase information. Denis correctly illustrates the uselessness of the information. In so many ways, the data collection systems we have today represent a 1995-style world, one where the data could be used for old-school targeting programs. Today's data needs are so very different. We don't have a lot of control over marketing anymore. Catalog don't drive sales like they used to. Google controls the customer via search. Mass marketing is largely dead because we don't have a mass to market to. We marketers need to harness customer intentions, and use that information to influence merchandise assortment and in-store/website presentation, which drives sales.

Andy Monfried writes about his efforts at landing a key client. Pay close attention to what he talks about. Technology doesn't play a role in his success. Hard work, perseverance, and an element of humanity result in success.

Finally, on Fallon's Trendpoint Blog, we learn about plucky ad agency Anamoly's acquisition of the Virgin America account. Funny how Anamoly didn't pitch classic advertising techniques ... they offered to help grow sales. After a deluge of Super Bowl ads designed to drive "buzz", we learn about somebody who wants to increase sales.

February 15, 2007

6 In 10 E-Mail Campaigns Compete On Price?

Chad White must not have a lot of free time.

Host of the popular RetailEmail blog, Chad does the work we don't have time to do --- he subscribes to most business-to-consumer e-mail programs, then shares what he observes with his audience.

Chad compiles many of the e-mail campaigns in a feature called the "Subjectivity Scanner". He lists the subject line of each e-mail campaign he chooses to feature in this section.

I analyzed the subject lines from October 2006 and February 2007. I purposely omitted November, December and January, months that are highly promotional in nature.

Within the e-mail campaigns Chad listed for us, any time I saw the word SALE, % OFF, FREE SHIPPING, GIFT, or any other variation of a price promotion, I categorized the e-mail campaign as "Competing on Price".

After compiling the results, 59% of February E-Mail campaigns, and 58% of October E-Mail campaigns "Competed on Price".

Did we cause customers to demand rock-bottom prices, or are we simply responding to the fact that customers won't purchase online unless there is a huge incentive to do so? In our modern era of commerce, do we simply have nothing better to offer the customer than a low price?

Of course, I don't have the answers to those questions. I can share why business leaders continue to feed us discounted merchandise.

The table below illustrates possible outcomes of an e-mail test, comparing a normal e-mail campaign to one where the business offers 20% off all merchandise purchased by the customer.

As you can see, the promotion significantly improves open and click-through rates, causing at least thirty percent more customers to visit the website. In total, two-thirds more sales are generated.

And you need this level of sales increase to offset the discount you give to the customer. In this example, profit is very similar in both groups.

If you are a business leader, you can look good, and drive a huge increase in sales, at the same level of profit. Or, you can maintain your integrity, and fight your way through sales decreases. Either way, profitability could be similar.

Chad's data indicates that most business leaders decide to grow net sales. As a result, they have to offer promotions. When this is done over and over again, year after year, the business attracts a customer file that expects a deal. In essence, the customer is trained to expect something for nothing. Re-wiring customer expectations becomes very, very challenging.

Time for your thoughts. Pretend you are an executive. Are you willing to reduce your e-mail campaign productivity by forty percent, in order to build a long-term customer file that is willing to pay full price for your merchandise?



E-Mail Productivity: Regular Message Verses Off-Price






Regular 20% Off


E-Mail E-Mail




E-Mails Delivered
100,000 100,000
Open Rate
23.0% 28.0%
Click-Through Rate
35.0% 39.0%




Website Visitors
8,050 10,920
Conversion Rate
2.0% 2.6%
Average Order Size
$200.00 $185.00




Total Demand
$32,200 $52,525
Net Sales 85.0% $27,370 $44,646
Gross Margin 45.0% $12,317 $20,091
Less E-Mail Cost $0.003 $300 $300
Less Promo Cost 13.0% $0 $5,804
Less Pick/Pack/Ship 11.0% $3,011 $4,911
Variable Profit
$9,006 $9,076

February 14, 2007

Friends of MineThatData Promotion

A quick call-out to Friends of MineThatData blogger Ron Shevlin for his recent promotion at Epsilon. Great job, Ron!!

Dolly Parton, Disco, And Social Media

It's Valentine's Day. What better way to celebrate than to turn on Casey Kasem's American Top 40 from February 1979 on XM Satellite Radio?

At number twenty-six, second week in a row, is the disco hit "Baby I'm Burnin'" by Dolly Parton.

Mr. Kasem reminded his loyal audience that Ms. Parton became the first artist to ever record a hit single on the three major charts ... the Top 40 Chart, the Country Chart, and the Disco Chart.

It would have been fun to be a fly on the wall, as Dolly's management team discussed whether disco was an extension of the "Dolly Parton brand".

In twenty-eight years, will we see social media the same way we see Dolly's brief foray into the world of disco?

Ironically, the song currently playing, at number twenty-three, is "What A Fool Believes" by the Doobie Brothers!

February 13, 2007

Leadership and Communication

Six years ago I received my assignment as Vice President of Database Marketing. I was energized by the opportunity to put my stamp on the database marketing world.

I figured I could make magic happen, simply because I had a fancy title that demanded respect.

Within days, the cold reality of the business world humbled me. It would take a lot more than a fancy title to get things done.

Twelve thousand hours of work and maybe more than seven thousand hours of meetings later, I have learned how leadership and communication are forever dependent upon each other.

Here's an example of the importance of communication. Consider the following two statements.

Statement #1: We will be installing new campaign management software in April. Consultants will be here in March to learn everything about your job. These individuals will help us figure out how to be more efficient by using the new software in our day-to-day jobs. We expect some job responsibilities to change. Thank you for your patience as we work through this transition.

Statement #2: I have spoken with many of you about your job responsibilities. I have heard your concerns, and have observed the long hours you are working. In spite of repeated requests, management chose not to add staff to our department. Given management's point of view, I decided to purchase campaign management software, software that should make our jobs easier. Because each of you are so overworked right now, I am hiring consultants to help us identify ways to best use the software. It is my sincere desire to have the consultants work with us in March, to install the software in April, begin using the software in May, and have a more manageable workload in June. If this transition goes well, I expect there to be enough surplus time for some of you to begin tackling strategic projects early this summer. I'm glad you spoke up and asked for a change. What questions do you have that I might be able to answer for you?

If you listen closely to each statement as the statement is read, you are likely to develop a mental picture of what you think is happening.

The first statement is relatively vague. As a result, the employee will fill in the blanks for herself. If her questions are not answered by what is said, she is likely to make assumptions about the pieces of information that are missing.

The second statement, while not perfect, paints a picture that is different. There is more information. There is less room for the employee to feel doubt.

If there is anything I have learned over the past six-plus years, it is the importance of telling as much as you can to your employees about what is happening, why it is happening, and how the employee benefits (or avoids trouble) by following the direction of the executive. Communication must be followed up with actions consistent with the communication.

Failure to communicate leads to uncertainty, doubt, gossip, and even bad feelings. Failure to act in a manner consistent with your communication destroys trust. Failure to do both is simply not a fair way to treat your employees.

Are there examples of individuals you have worked with, individuals who are great communicators? What lessons did you learn from the communication style of these leaders, or co-workers?

February 12, 2007

The Square Root Rule: Better Defined

One of the great things about the blogging world occurs when individuals improve upon your simplistic work, developing the concept into something better, something more useful. Many big analytical companies hoard ideas and intellectual capital. Others freely give, in an effort to benefit all.

Enter Friend of MineThatData Alan Rimm-Kaufman and his development of the Square Root Rule --- found on his organization's excellent blog. Please click here for a well-written exploration of the topic of understanding how much money should/could be spent on advertising.

The Fast Company Blog: Deleting Negative Comments

I've enjoyed reading Fast Company since the go-go internet days of the late 1990s.

During the past year, I've been an avid subscriber to their blog.

Today, Fast Company wrote about personalizing Kleenex tissue boxes. In fact, the writer was critical of the idea.

I found the criticism unfair, because Fast Company generally supports marketing innovation, promoting those who try new things. So, for the first time ever, I wrote a comment on the Fast Company Blog. I stated that I found it unfair that Fast Company pushes companies toward marketing innovation, only to then bash innovation when it doesn't meet Fast Company expectations. I did not use profanity, I simply used similar text to what I describe here.

For the next hour, my comment was listed first. And then, it mysteriously disappeared.

I guess my mistake was to criticize Fast Company. Maybe if I had discussed whether the actual strategy was good or bad, my comments would not have been deleted.

Now that I know that Fast Company does not encourage an open discussion among its loyal readers (a decade of loyalty, on my behalf), I have chosen to unsubscribe from their RSS feed. I'm certain they won't miss me.

This also causes me to feel uncomfortable about the motives of other business blogs. Who knows how often comments are deleted, all in the spirit of promoting a 'conversation' that is perceived to be open and honest? Because this problem also happened when I left comments with a Seattle-based business blogging organization, it could be more widespread than my naive mind perceives it to be.

Am I stupid to allow all comments, positive or negative? Am I stupid to leave comments on other websites that may be critical? What do you think the right strategy is, brand protection or open commentary regardless of the content?



UPDATE: 10:41am PST: A reply from Fast Company suggests the omission was part of a spam filter. Let's take them at their word, and appreciate the fact they responded to me in a positive way. Here's what they said:

Hi Kevin, Comments are never removed based on content. If the comment posted, then disappeared, it was inadvertently deleted. I'm so sorry about that! We welcome diverse opinions and would never remove something because it was critical of the magazine. I hope that you will re-post the comment. Again, I'm very sorry about the inconvenience. We get a lot of spam, and it sounds like your comment was accidentally removed as part of an overzealous spam purge. Best wishes, Leslie.

February 11, 2007

The Grammy's Of Multichannel Marketing

On Sunday evening, artists received awards at music's biggest evening, the Grammy's.

Today, it is your turn to rebuke my recent criticism of a lack of talent in the multichannel marketing industry.

I am asking you to identify the individuals who are deserving of recognition in the multichannel marketing industry.

Please use the comments section of this post to identify individuals you have worked with, individuals who are worthy of recognition, individuals who may not get the recognition they deserve.

Name the individual, list the company the person works for, choose one of the following categories, and then describe what this person does that is worthy of recognition. I will publish some of the particularly enlightening commentary as individual posts over the next few weeks.

Here are the categories you may choose from:
  • Merchandising
  • Creative
  • Operations (Pick, Pack 'n Ship and Call Centers)
  • Finance
  • Inventory Management
  • Circulation (List Rental, Compiled Lists, Housefile Circulation, Database Marketing, Sales Planning).
  • Online Marketing (Search, Portals, Affiliates, etc.)
  • E-Mail Marketing
  • Data Mining and Business Intelligence
  • Web Analytics
  • Information Technology
  • Leadership (Executives who deserve recognition).
  • Management (Directors and Managers who deserve recognition).
  • Vendors (Individuals at organizations you outsource key functions to).
  • Other (Areas that are not easily classified above).

February 09, 2007

Running A Business Without Discipline

We frequently read about the importance of "managing the brand", about providing a great brand experience for the customer.

In the catalog/online world, it is just as important to properly manage the fundamentals of the business, the 'back of the office' execution that can make all the difference in the world.

There are several elements that all must be executed in harmony, executed efficiently, for the business to produce profit.

Fulfillment Rate: It should be no surprise that having the right merchandise available is an important part of meeting customer expectations. Too much merchandise yields markdowns. Too little merchandise yields lost sales. I spent my formative years at Lands' End. They were really good at striking that all-important balance.

Return Rate: Businesses don't have a lot of control over what is returned. For instance, the return rate on a pair of shoes is very high. The return rate of an iPod is probably a lot lower. However, businesses can take steps to reduce the return rate. Quality control is important. Using text to describe merchandise is important. Color-matching is important, so that the customer knows she is getting a 'lilac' dress.

Gross Margin: Closely related to fulfillment rate, gross margin is one of the most important profit drivers in a business. Gross margin is the difference between what the item sells for ($100) and what the item cost the business ($50). Markdowns are gross margin killers. Merchants who know 'what sells', and inventory managers who know 'how much to purchase' drive a lot of profit.

Pick, Pack 'n Ship Expense: Businesses should invest considerable effort in running an efficient call center and distribution center. Overstaffing either center results in too much expense. Inefficient ways to store merchandise result in added expense. This is an area that really good businesses focus a disproportionate amount of effort on improving.


When a business manages these areas efficiently, profit falls to the bottom line. When a business fails to manage these areas effectively, the business must significantly increase sales, in order to pay for its own inefficiencies.

In the table at the end of this article, one quickly notices that inefficiencies cause the business to have to sell nearly twenty percent more merchandise to achieve the same level of profitability. Think about that. When a business is run in a sloppy manner (the example below is not all that sloppy, by the way), customers need to spend twenty percent more just to help the business achieve the same amount of profit.

Leaders need to balance the importance of 'brand building' activities with the everyday tasks of running a business efficiently.


Profit And Loss Statement: Well Run Verses Sloppy Business







Base Case
Sloppy
Demand
$5,000,000
$5,854,500
Fulfillment Rate 90.0% $4,500,000 88.0% $5,151,960
Return Rate 25.0% $1,125,000 27.0% $1,391,029
Net Sales
$3,375,000
$3,760,931
Gross Margin 50.0% $1,687,500 48.0% $1,805,247
Less Marketing Expense
$800,000
$800,000
Less Pick, Pack & Ship Expense 11.0% $371,250 13.0% $488,921
Variable Operating Profit
$516,250
$516,326
Percent of Net Sales
15.3%
13.7%





Required Increase In Volume To Achieve The Same Profit: 17.1%