November 20, 2014

More Channels, Same Purchase Frequency

We hear a lot about income inequality, don't we?

Often, among the retail, e-commerce, and catalog businesses I analyze, I also observe interesting dynamics that have parallels to what is happening out in the real world.

Back in the 1990s, I worked at Lands' End and Eddie Bauer. Both businesses generated disproportionate profit from what I would call "middle class buyers". My definition is not based on income, it's based on annual purchase frequency.

All businesses have elite customers ... those who purchase 5+ times a year. A nice chunk of profit comes from this small group of customers.

All businesses have a glut of unproductive customers ... those who purchased one time in the past twelve months. The secret here is to be able to generate profit on just the one transaction ... something that catalogers find increasingly difficult ... something that e-commerce brands are easily able to accomplish.

The middle class, then, are customers who purchased 2-4 times in the past year. These folks contribute above-average levels of profitability. We all need a healthy middle class, in order to achieve 10% pre-tax profit.

In recent years, the middle class is shrinking.

Here's a common outcome, when I run a query on percentage of buyers by purchase frequency, across the past decade.


1x buyers are increasing in share.

5x+ buyers are increasing in share.

2x - 4x buyers are decreasing in share.

This is a logical outcome of a multi-channel / omni-channel strategy. What happens, of course, is that all the attention is centered around the "best" customers, so long as the best customers shop multiple channels. The strategy appeals to this small subset of the population.

Unfortunately, the strategy does not appeal to the "middle class" ... customers who are merchandise-centric, and not channel-centric. These customers, over time, become less and less thrilled with the direction of the business (especially as retail begins to limit the assortment - focusing only on best sellers in stores), and purchase less often, falling into 1x status (per year) at greater rates.

The net of all of this activity is often nothing ... you lose sales from the middle class, you gain sales among hyper-loyal omnichannel buyers, yielding the same financial outcome.

Eventually, though, these business models are starved from the outside ... too few new buyers ... too few reactivated buyers ... and when new/reactivated buyers purchase, they are 1x buyers with lower long-term value.

Run the query - see if this is happening to your business.

It's my opinion that while a majority of businesses chase omnichannel endeavors, a minority of businesses will figure out the merchandising reasons the "middle class" buy from a business, and will thrive.