August 07, 2008

Evaulating The Long-Term Impact Of Merchandise Sold Today

Every once in awhile somebody says something that causes you to dig way back into the memory bank and identify a previously successful way of viewing the business.

Jim Novo wins the prize this time.

As we've done many times in the past two years, we go back to Lands' End, in early 1995, back in the days when we did mainframe-based text messaging tha
t would today be lauded by the pundits as an innovative and revolutionary use of corporate social media.

We evaluated items on the basis of two customer dimensions. Did the customer who purchased an item (say a mock turtleneck, the kind Jerry Seinfeld used to wear) purchase again from the company in the next year, and did the customer who purchased the item purchase it again in the next year?

Here's the grid:



There are some items that customers love. Customers who buy these items are likely to purchase from your brand again in the future --- and they are likely to buy the item again. In the Hillstrom household, this would represent the purchase of ice cream from the local grocery store!

There are some items that customers buy, causing them to love your brand, but not resulting in a purchase of the same item again in the future. This might represent the purchase of a flat panel television from Best Buy. There's nothing alarming about this situation --- but pay close attention to subsequent items, as this can be leveraged in your targeted e-mail marketing campaigns.

Now look at the lower right hand quadrant of the image. There are items that customers purchase, and then the customer disappears.

Pay attention to these items!

More important, calculate the profitability of these items, factoring in advertising expense (catalogs, e-mail marketing, paid search, portal advertising, affiliates, shopping comparison sites, you name it). Items that are unprofitable should be immediately evaluated, because these items are toxic on all levels (customers don't come back, company doesn't generate profit).

The items that generate profit, but do not generate customers, need to be seriously evaluated as well. Your company is simply generating short-term profit, not resulting in any long-term benefit. Did you execute a marketing campaign on an item, promising it was a "solution" to some problem that resulted in the alienation of customers who purchased the item?

This isn't a revolutionary idea, it is something that has been done for decades. Since it isn't hard to calculate customer repurchase rates at an item level, why not give it a try?

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