January 30, 2013

Kaley's Knits: Fixing Self-Inflicted Wounds

By running a simple set of diagnostics, we quickly diagnose why a business is struggling. In the case of Kaley's Knits, some of the problems are self-inflicted.  These problems won't be solved by a "robust mobile strategy" or "three easy steps to social media success".

No, self-inflicted wounds can be healed by refocusing on fundamentals.

There's enough time to set goals for the rest of 2013.  Why not do this?

Goal #1 = Increase annual new customer counts from 99,120 to 115,000 per year.  Yes, this is an audacious goal.  But the impact on the business is substantial.  The customer file fell off the fiscal cliff once marketing dollars were taken away from customer acquisition activities.  When the customer file drops, sales drops are coming within a 6-12 month window, if not sooner.  I would immediately shift the focus of the marketing team away from a "socially engaging business that capitalizes on the burgeoning mobile opportunity" to a simple goal - "find more new customers"!  I don't care how Kaley's Knits finds more customers, that's the job of the marketing department.  Notice that I did not put a spending parameter on this goal.  If marketing can yield customers that generate profit during 2013, then marketing should be able to spend whatever marketing needs to spend to accomplish the goal.

Goal #2 = Increase gross margin percentage to 59%.  Gross margin was at or above this level from 2009 to 2011.  Of course, this is going to lead to a significant reduction in discounts/promotions, which may lead to a decline in demand.  This will be offset, in part, by the increase in new customer acquisition, which will fuel the business.

Goal #3 = Maintain average price per item purchased at between $33 and $36.  This prevents the merchandising team from artificially marking-up merchandise to artificially inflate gross margin dollars.  This will push down average order value inflation.  As we have observed, average order inflation pushes some customers out, requiring the brand to offer discounts/promotions to bring the customer back.  Why play this game?

Goal #4 = Increase variable profit to $6.0 million.  This should be achievable with a focus on new customers and a de-emphasis of discounts/promotions.  Notice that my goal has nothing to do with earnings before taxes.  99% of employees have little or no control over fixed costs.  Give employees the ability to manage metrics they control.

Goal #5 = Maintain annual repurchase rate.  I did not share data about annual repurchase rates in this project, but annual repurchase rates were 37% in 2012, 38% in 2011, and 38% in 2010.  Keeping customers is not the problem at Kaley's Knits.  So, the goal, given all of our moving parts, is to maintain repurchase rates at 37%.

I'm not telling Kaley's Knits staff HOW to do anything, am I?  I am simply setting goals that, when reviewed by smart people, eliminate all of the activities that cause a business to self-inflict wounds upon itself.  It will take a solid year of discipline for Kaley's Knits staff to adjust to the goals, make changes, and properly manage the profit and loss statement.

As staff manage to the goals I assigned, the focus can shift to the activities that cause profitable sales growth.  It is my guess that this will be a difficult transition for the staff at Katie's Knits, because through most of 2013, there won't be an easy path to sales growth.

In most cases, sales growth comes from two factors.
  1. Low-cost customer acquisition programs that yield a significant increase in the number of new customers (marketing's responsibility).
  2. A significant increase in merchandise productivity, yielding a significant increase in annual repurchase rates and orders per buyer per year (merchandising's responsibility).
When you look at the profit and loss statement, you see that Management at Kaley's Knits tried to artificially grow the business.  The results, predictably, were not good.

Fortunately, self-inflicted wounds can heal.  For 2013, I would ask the staff at Kaley's Knits to refocus on the basics of running a business.  In 2014, I would expect the merchandising team to step up to the plate with improvements in merchandise productivity.  In 2014, I would expect the marketing team to have a low-cost acquisition plan that could yield 125,000 new customers per year.  The combination of merchandise productivity and new customer acquisition would solve all profitability problems at Kaley's Knits, generating enough profit to offset increases in fixed costs, generating enough profit to fund future mobile developments.

Your turn - what goals would you set up for the Management Team at Kaley's Knits, and why would you create the goals you are advocating?

8 comments:

  1. Bill Jeffries6:38 AM

    Hi Kevin,

    I'm a long-time reader of your daily blog, as well as fan of your very practical, database analysis-driven methodology (and, full disclosure, I've experience results as a client of yours). Love the way you lay out the "case studies" like Kaley's Knits... and no doubt many direct marketers can (or should) see themselves in this story.

    You really set yourself apart from the typical, starry-eyed omni-channel infatuated pundits (and business owners/execs) chasing after the latest shiny object. You recognize the changing landscape we're in, and the urgent need to test, analyze, understand and set real-world goals... but you hold to those (some think boring) core business and direct marketing fundamentals!

    Keep it up!

    Bill Jeffries

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  2. Thanks for the nice comment, much appreciated!

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  3. Mark D.7:31 AM

    I echo Bill Jefries comments. Thank you for your excellent work. I see my own company in Kaley's Knits. The fundamentals matter! Thanks again!

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  4. Thanks for the nice comment, Mark, I appreciate it!

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