February 26, 2014

Where It Hurts Most - Lapsed Buyers

I frequently share thoughts about new merchandise.

Yup, that stuff. The stuff we largely ignored for the past half-decade.

Many of you keep telling me that you can no longer "reactivate" older customers.

Here's what happens, folks.

Let's say that you have a 10% drop in merchandise productivity, over time, fueled by a failure to generate enough new, "winning" items.

Among your best customers, you continue to mail catalogs, plenty of catalogs. As a result, you only suffer the 10% merchandise productivity hit.

Marginal customers, however, that's a whole different story. These folks might generate $2.00 per book, at a 40% profit factor, with a book cost of $0.75 each.
  • $2.00 * 0.40 - $0.75 = $0.05 profit.
Now, you have a 10% merchandise productivity hit. The profit and loss statement fundamentally changes.
  • $1.80 * 0.40 - $0.75 = ($0.03) ... a loss.
You cannot mail the customer at a loss.

So you don't mail the customer.

And you lose out on the $1.80 the customer would have spent.

As a result, best customers experience a 10% productivity drop.

But marginal customers experience a 50% productivity drop - you stop mailing these customers, causing only the organic portion of the demand equation to come through.

Just like that, marginal customer spending is cut in half.

And it's because of the cascading effects of merchandising problems, specifically, a failure to generate enough new items over time.

In this case (I see it every day), it's not the catalog business model that is dying - it's the business that is dying!