January 31, 2013

Kaley's Knits: Cheating

Today, we end our month-long journey through the customer file at Kaley's Knits.

I know, some of you are dissatisfied with my conclusions.
  • "You diagnosed the problem, but you didn't tell us how to fix the problem.  What are the tactics we should use to quickly fix the problem?  Should we offer 10% off instead of 20% off?  Should we offer free shipping with a hurdle instead of free shipping, no hurdle?  Should we double our email frequency?  Should we expand into mobile?  Should we connect with the "social shopper"?  Would tablet commerce help us grow new customers?  Should we rent names from co-ops at $0.06 a pop?  Should we change paid search vendors?  Why not try big data, that should help, right?"
Those who complain are looking to cheat the system.

Kaley's Knits has an expense problem.  Fixed costs are increasing, and are rapidly eroding profits.  There are only two solutions to a fixed cost problem.
  1. Reduce expenses.
  2. Grow sales profitably.
How do we grow sales profitably?  Pretend that marketing didn't exist, that you had to rely on merchandise productivity to grow sales profitably.  What would you do?  Well, you'd place sales growth accountability squarely on the shoulders of the merchant.  The merchant would have to find products that customers craved, and would have to find products that aren't easily knocked-off by competitors.  And if the merchant failed, the merchant would not longer be employed by the company, right?

Yes, it is terribly hard to increase merchandise productivity.

Because it is so terribly hard to increase merchandise productivity, we try to cheat, don't we?  We hire marketers.  Marketers apply magic to the problem.  Of course, all magic comes with a price.  We chase expensive items with hefty gross margins, and when growth doesn't come fast enough, we offer discounts and promotions to "tickle the buying bone".  We abandon expensive new customers, seeking instead to squeeze more juice from the loyal customer lemon.  We starve new customers, we offer sugary confections to existing customers.  We hurt the profit and loss statement.

And then we look for easy answers to problems that the marketing team created.

This is cheating.  We're cheating on top-line sales growth, we're cheating the profit and loss statement, and we're looking to cheat via easy solutions to complex problems.

The solution, of course, is to simplify.  We're going to fill the bowling alley gutters with bumpers, so that the bowling ball cannot go into the gutter - as a result, we're guaranteed to knock down a few pins.
  • Goal 1 = Increase Annual New Customers from 99,120 to 115,000 per year.
  • Goal 2 = Increase Gross Margin to 59% of Net Sales.
  • Goal 3 = Maintain Average Price per Item Purchased, to between $33 and $36.
  • Goal 4 = Increase Variable Profit to $6.0 Million.
  • Goal 5 = Maintain Annual Repurchase Rate at 37%
There isn't a single tactic among the five goals.  Your job is to create tactics.  You are accountable.  

Your tactics, however, cannot cause damage to any of your goals.  If you discount heavily, you eliminate a chance to succeed at Goal 2.  If you overspend to acquire new customers, you eliminate a chance to succeed at Goal 4.  If you trim marketing expense among existing customers, you eliminate a chance to succeed at Goal 5.  If you fail to accomplish Goal 1, you make it terribly hard to to achieve Goal 4 later in the year.  If you raise prices too much (Goal 3), you might have a clearance issue, requiring discounts/promotions, making it impossible to succeed at Goal 2.

In other words, we set Goals that prevent the marketer from going off the fiscal cliff.

By doing this, we place accountability squarely in two areas.
  1. The marketer must not cheat.  The marketer must be disciplined.  Cheating is not allowed.
  2. The merchant must improve merchandise productivity.
We don't tell employees HOW to do something.  Instead, we make sure that success will not happen by cheating.  

Success will come from hard work.

Many employees will hate this approach (you may be one of those who hate this approach).  We are causing each employee to be accountable for success.  If the employee fails, the employee should receive a poor performance evaluation, and ultimately, not be employed by the company.  This is the start of the documentation process, folks.

I know, this isn't what 90% of you wanted to hear about.  You wanted "Six Easy Steps For Social/Mobile/Local Success", things like this:
  1. Identify your target customer.
  2. Create products that your target customer needs.
  3. Use social media to cause your products to go viral.
  4. Apply mobile strategies to be everywhere your customer is - Woodside Research says that 77% of e-commerce transactions will be on mobile devices by 2018.
  5. Use big data to leverage local opportunities.
  6. Reap the rewards.
Good gravy!

Instead, I spent a month sharing a forensic strategy for identifying the reasons a business is in the middle of a painful collapse.  It's your job to fix the business.  

You are accountable.  Use this methodology to identify problems.  Then you, and only you, should fix the problems.

Discuss.

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