December 19, 2010

Dear Catalog CEOs: New Product Driven Business

Dear Catalog CEOs:

We've spent the better part of a month chatting about "Class Of" reporting.

We're looking at merchandise reporting, not customer reporting.  Unfortunately, this might be the only place in the direct marketing world where we'll spend time talking about merchandise.  You, fortunately, already know that merchandise means everything.  Without merchandise, customer service is meaningless.  Without merchandise, channels are meaningless.  Without merchandise, you don't have any customers.

You'd think everybody would spend time talking about merchandise.

Here is another business, evaluated via "Class Of" reporting.

What do you observe, when you review the report?

First of all, nearly 45% of sales come from new items ... this is a very different business model than the business we previously advertised.  This business cannot move forward without new items!

Second, there is an 81% correlation, a 65% r-squared, between the productivity of each item, and the number of items offered to the customer on an annual basis.  And as expected, when more items are offered to the customer, productivity per item decreases ... 6,000 items yields us about $12,000 per item, while 12,000 items yields us about $9,500 per item.

Third, there is an 85% correlation, a 72% r-squared, between the productivity of a new item and the productivity of a new item in the second year the new item is offered.  Some of this is due to the number of new items, some of this is due to the fact that if product development suffers, future product productivity suffers.

This business is growing because Management chose to dramatically ramp-up the number of items offered to a customer ... this business is not growing because of the inherent productivity of the items offered.  This is not uncommon, it is hard to increase the productivity of individual items.  The problem, of course, is managing individual items from an inventory perspective.  When skus proliferate, lots and lots of things happen to a business, many of which are unpleasant.  At some point, you have too many skus, resulting in liquidation problems and significantly reduced profit.  Inventory is like produce ... when it goes bad, it's bad!