October 20, 2010

Incremental Sales Week: Merchandise

It is not uncommon for merchandising teams to introduce new product lines. In fact, merchandising teams have to introduce new product lines, without new product, a business will die a slow and painful death.

But new product lines do not always yield Incremental Sales.

Let's say you have an e-commerce business that generates $2,000,000 sales a month, and you are expecting sales this month to be distributed as follows:
  • Merchandise Division #1 = $700,000.
  • Merchandise Division #2 = $500,000.
  • Merchandise Division #3 = $300,000.
  • Merchandise Division #4 = $300,000.
  • Merchandise Division #5 = $200,000.
  • Total = $2,000,000.
Your merchant team adds a new division, #6, to the fold. After one month, your sales look like this, by Merchandise Division:
  • Merchandise Division #1 = $600,000.
  • Merchandise Division #2 = $500,000.
  • Merchandise Division #3 = $300,000.
  • Merchandise Division #4 = $300,000.
  • Merchandise Division #5 = $200,000.
  • Merchandise Division #6 = $200,000.
  • Total = $2,100,000.
An interesting thing happens in companies. Business leaders with sales decreases "feel the pain". Business leaders with sales increases "get rewarded".

In this case, total sales increased by $100,000. This is the level of "Incremental Sales" that we want to credit to the business. Merchandise Division #6, the new product line, generated $200,000 sales. Therefore, 50% of what Merchandise Division #6 generated is "incremental", 50% is "cannibalized" from the rest of the business ... in this case, cannibalized from Merchandise Division #1.

There is an art involved in analyzing a business. All of our real-time metrics suggest "truth". Reality is different, however. In this case, Merchandise Division #1 didn't necessarily "fail", rather, it was the victim of business evolution, and that is ok as long as everybody understands that the business evolved with the addition of a new Merchandise Division.

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