January 08, 2015

Hippoman's Big And Tall: Customer Loyalty

I want you to look at the annual repurchase metrics at Hippoman's Big And Tall:
  • 2014 = 22.7%.
  • 2013 = 26.2%.
  • 2012 = 26.9%.
  • 2011 = 25.1%.
Tell me what you see, here. Go ahead, think about it for a moment, I'll wait for you.

Two things should stand out.
  1. Repurchase rates collapsed in the past twelve months. That's a problem. That's the obvious trend.
  2. Annual repurchase rates are really, really low (and that's not uncommon).
This is the part of a project I hesitate to communicate to folks. You see, when the facts are shared (low annual repurchase rate), the majority of folks who hear this news think they can "fix" annual repurchase rates.

Nobody is going to "fix" annual repurchase rates. Nobody.

Each business possesses unique dynamics. Wal-Mart is able to get customers to purchase 35-40 times per year, that's a key component of their business model. At Nordstrom, we kept 75% of last year's purchasers. At Eddie Bauer, back in the day, it was around 50%. At Lands' End, in 1990, it was 60%. All three of those businesses sold merchandise that gave the customer a reason to buy frequently ... 6 times a year at Nordstrom ... 3 times a year at Lands' End ... 2 times a year at Eddie Bauer.

There is a direct correlation between "need to purchase" and "annual repurchase rate".

I work with countless businesses that have a customer base with a 25% annual repurchase rate ... these businesses are often highly profitable.

In this case, I'll share the data with Mr. Hippoman. I will tell Mr. Hippoman that when he "fixes" his business, his annual repurchase rate will be lucky to be 30%. I'll tell Mr. Hippoman that this means his business must be in a constant, unending quest to find new customers at a very low cost.

And Mr. Hippoman, in all likelihood, will tell me that he and his merchandising team need to "fix" this problem - he'll tell me that they need to put in a loyalty program to get the repurchase rate up to 50%. He'll tell me that competitors have high rates (50%), so his low rate is a reflection of a failure of his team to run the business properly.

Mr. Hippoman will be wrong. He created a business that is designed to encourage customers to buy every 2-3 years, not every 2-3 months. The merchandise assortment is likely to be aligned with infrequent purchase cycles ... it's hard to fix that. You don't need to fix that, either. You just need to find new customers and generate profit on most transactions.