February 12, 2008

Abacusification And The Merch Curse

We spent the past two days talking about the problems e-commerce and catalog brands have with loyal customers who adore the merchandise the brand used to sell.
  1. The curse of great merchandise.
  2. For best customers, the merch curse is worse.
In yesterday's example (averaged from actual e-commerce and catalog transactions), best customers spent 65% of their dollars on classic merchandise, stuff offered by the brand for at least the past four years.

Conversely, new and marginal customers spent 37% of their dollars on classic merchandise, 63% of new products offered by the brand for at least the past four years.

This brings us to the concept of Abacusification, named after the venerable catalog co-op (Abacus) that enables catalogers to mail prospects at a comparatively low cost. To be fair, the concept applies to all co-ops and list rental brands.

Abacusification occurs when a catalog/e-commerce brand shifts a disproportionate percentage of circulation (usually 20% or more) into co-op names. At this point, the co-op statistician has a disproportionate amount of influence over response rates, long-term customer retention rates, and the merchandise assortment offered by the catalog/e-commerce brand.

Using yesterday as an example, Abacusification is demonstrated by the fact that new customers spend two-thirds of their money on new products, while loyal customers spend two-thirds of their money on existing products.

What the heck do you do if you are the merchant responsible for this brand? Over time, you end up aligning your merchandise with the Abacusification of your customer file --- it happens naturally, without you even noticing it. Conversely, you notice that long-time loyal customers start to disappear --- well, you probably don't notice this, you simply notice that time-honored merchandise no longer performs as well, so you de-emphasize classic merchandise.

Within a few years, the Abacusification of your customer file is complete. Your customer file is composed of co-op dominated names that have merchandise preferences different than your legacy customers.

To be fair, this may have always happened when you worked with your list rental and list management partners. The difference is this --- in the past, the lists you selected determined your long-term merchandise assortment --- as you acquired customers from your competitors, you ultimately evolved your merchandising assortment along with the interests of the customers shopping your competitors.

Under Abacusification, the co-op statistician drives the evolution of your merchandise assortment.

There may be nothing wrong with having a co-op statistician have this much influence over the direction of your brand --- you may find the evolution to be more profitable than strategies you otherwise would have practiced. That being said, it makes business sense to have oversight into the practices of the co-ops you partner with. The co-op should be transparent, opening the books for you, showing you exactly how they determine who they decide to mail on your behalf, providing reporting that makes it perfectly clear who is being chosen.

Ok, your turn. What have you learned when you've analyzed your customer file in this manner? How often do you produce this reporting? How do you manage this challenge? Or do you view all of this as bunk?

2 comments:

  1. Under Abacusification, the co-op statistician drives the evolution of your merchandise assortment.
    There may be nothing wrong with having a co-op statistician have this much influence over the direction of your brand --- you may find the evolution to be more profitable than strategies you otherwise would have practiced.


    Really interesting, Kevin.

    If you've not read Ian Ayres' "SuperCrunchers" (ISBN 0553805401)
    amzn link:
    http://tinyurl.com/2bpbph
    )

    you should check it.

    Ayres discusses what happens when "the machine" (the model, the database, the algorithm) heads in a different direction than, and in fact does better than, the human "expert".

    Good merch can go beyond the numbers.

    Stats and DBs and algos are always backward looking. They don't and can't generate the out-of-the-box, out-of-the-dataset innovation.

    Google. Ipod. Fedex. What have you.

    Nice post, thanks!

    Cheers --

    Alan

    rkgblog.com

    ReplyDelete
  2. Yes, I did read that book!

    As long as co-op customers have a similar (not the same, but similar) preference to legacy customers, then the merchant has control, can go beyond the numbers.

    ReplyDelete