October 31, 2013

How Merchandise Productivity Hurts Marketing Productivity

How many marketers understand that marketing productivity is the outcome of merchandising productivity?

Let's walk through an example. Pretend you are a search marketer. You bid on a keyword, you drive traffic to the website, and the website (hopefully) converts the customer. Old-school stuff, been around for at least a decade or more. Here's what happened in 2012.
  • Clicks = 1,000.
  • Cost per Click = $0.50.
  • Conversion Rate = 2%.
  • Average Order Value = $100.
  • Profit Factor = 30%.
  • Total Demand = 1,000 * 0.02 * 100 = $2,000.
  • Total Cost = 1,000 * 0.50 = $500.
  • Total Profit = $2,000 * 0.30 - $500 = $100.
  • Profit per Order = $100 / 20 = $5.00.
That's good. This keyword produced profit in 2012.

Then, in 2013, your merchandising team cut back on new item development by 30%. This hurt total customer productivity by 20%. Now look at what your keyword profit and loss statement looks like:
  • Clicks = 1,000.
  • Cost per Click = $0.50.
  • Conversion Rate = 1.6%.
  • Average Order Value = $100.
  • Profit Factor = 30%.
  • Total Demand = 1,000 * 0.016 * 100 = $1,600.
  • Total Cost = 1,000 * 0.50 = $500.
  • Total Profit = $1,600 * 0.30 - $500 = ($20).
  • Profit per Order = ($20) / 16 = ($1.25).
Your search program, on this keyword, went from generating profit and an ad-to-demand ratio of 25% to generating a loss and an ad-to-demand ratio of 31%.

You, the search marketer, didn't do anything different. 

You are the victim of falling merchandising productivity - specifically, the hatchet-job done by your merchandising team on new items.

But you are accountable for search results, correct? So you'll take action - you stop spending $0.50 a click - you change your budget. Now, you spend $0.40 per click. You're "optimizing performance".

And you're changing the number of clicks you get.
  • Clicks = 800.
  • Cost per Click = $0.50.
  • Conversion Rate = 1.8%.
  • Average Order Value = $100.
  • Profit Factor = 30%.
  • Total Demand = 800 * 0.018 * 100 = $1,440.
  • Total Cost = 800 * 0.50 = $400.
  • Total Profit = $1,440 * 0.30 - $400 = $32.
  • Profit per Click = $32 / 14.4 = $2.22.
Look at how many orders are generated:
  • 2012 = 20 Orders.
  • 2013, Merch Productivity Problem = 16 Orders.
  • 2013, Marketing Adjustment = 14 Orders.
In other words, the merchandising team, by not developing new items, cost the search program a 20% drop in orders - that's the problem caused by the merchandising team.

Then, the marketing team compounds the problem by optimizing for profitability, costing the search program another 10% of the orders of the prior year.

Search orders, as a result, are down 30%.
  • A 20% drop due to merchandise productivity.
  • A 10% drop due to marketing optimization caused by merchandise productivity problems.
As marketers, we're obsessed with the 10% portion of this 30% problem - we work our tails off trying to fix our end of the problem.

In reality, we need to work with the merchandising team on fixing the original 20% problem that caused the 10% problem that marketing addressed.

If you're a search marketer - an email marketer - an email marketer (said again for effect) - a catalog marketer - you're constantly being beaten up for problems that are not your fault. I keep watching as you are pummeled by your co-workers.

Why do you stand for this? 

Make sure you measure the dynamics that impact your business, your productivity, and assign accountability appropriately. And if you don't have the resources to do this yourself, give me a holler (kevinh@minethatdata.com).